The shifting and incidence of taxation

GIFT OF
MICHAEL REESE

t

THE SHIFTING AND INCIDENCE
OF TAXATION

BY

EDWIN R. A. SELIGMAN

PROFESSOR OF POLITICAL ECONOMY AND FINANCE
COLUMBIA UNIVERSITY

SECOND EDITION
COMPLETELY REVISED AND ENLARGED

f0NIVERSITT
\0,

PUBLISHED FOR THE COLUMBIA UNIVERSITY PRESS BY

THE MACMILLAN COMPANY

LONDON: MACMILLAN & CO., LTD.
1899

All rights reserved

COPYRIGHT, 1899,
BY THE MACMILLAN COMPANY.

J. 8. Gushing & Co. - Berwick ft Smith
Norwood Mais. U.S.A.

PREFACE TO THE SECOND EDITION

IN this edition so many changes have been made as to
constitute practically a new volume. The alterations and
additions are to be found in both the historical and the posi-
tive parts. A more careful study of the early English litera-
ture brought to light so much interesting material on the
theory of taxation that the entire Book First of Part One
has been devoted to it ; whereas, in the earlier edition, the
whole period was passed over in a few pages. This book
is therefore substantially new. In the Second Book a chap-
ter has been added on the Physiocrats, the last chapter on
the Mathematical Theory has been rewritten, and considera-
ble additions have been made to some of the other chapters.
In Part Two, devoted to the Positive Theory, a chapter has
been inserted on the general principles, chapter five has been
entirely rewritten, chapter seven has been amplified by a
closer study of import duties and stamp taxes, and chapters
two and three have been enlarged and amended. The whole
work has been so completely revised that scarcely a single
page will be found the same as in the first edition. Finally,
a bibliography and an index have been added. It is hoped
that these changes will ensure for this new edition a recep-
tion as favorable as that which has been unexpectedly ac-
corded to the original work.

In preparing this edition I have received great help from
my colleagues. Professors John B. Clark and Richmond

vi Preface

Mayo-Smith have aided me with valuable criticisms. To Mr.
Arthur M. Day I owe much for helpful suggestions in detail
as to both matter and form from the beginning to the close
of the work. From other friends also I have derived assist-
ance. Professor Ross of Leland Stanford University and
Professor Hull of Cornell University have laid me under
obligations by calling attention to desirable changes and
additions in the text. Professor Marshall of Cambridge and
Professor Edgeworth of Oxford have been kind enough to
point out some blemishes and possible improvements. Finally,
Mr. George W. Morgan has undertaken the very arduous
task of aiding me to read the entire prpof .

EDWIN R. A. SELIGMAN.

COLUMBIA UNIVERSITY, N.Y.
December, 1898.

TABLE OF CONTENTS

INTRODUCTION

PAGB

Terminology : Shifting, Incidence, Evasion, Effect i

PART I
THE HISTORY OF THE DOCTRINE OF INCIDENCE

BOOK I
THE EARLY THEORIES

CHAPTER I
THOSE WHO DISCUSS THE GENERAL EXCISE

The Origin: Hobbes, Cradock, Culpeper II

1. The Theory that the Excise does not rest on the Poor Consumers.

Mun, Waterhouse, Fauquier 13

2. The Theory that the Excise rests on Consumers in general.

Petty, Burnaby, Sheridan, Nickolls, Manley, Houghton, Tem-
ple, De Witt, Tucker, Young, Temple, Child, Gary, Nugent,
Vanderlint, Postlethwayt, Forster 18

3. The Theory that the Excise is shifted to the Landowners.

Anonymous writers, Pulteney, D'Anvers .... 46

4. The Theory that the Excise rests on the Traders.

Anonymous writers, Roberts, Ashley 49

CHAPTER II
THOSE WHO FAVOR A SINGLE TAX ON LUXURIES

Chamberlayne, Richardson, Tucker, Nickolls, Forster . . 55

vii

viii Table of Contents

CHAPTER III
THOSE WHO FAVOR A SINGLE TAX ON HOUSES

PACK

Decker, Postlethwayt, Fauquier, Horsley ; Massie, Young ... 60

CHAPTER IV

THOSE WHO FAVOR A GENERAL PROPERTY TAX
Culpeper, De Foe, Drake, Wagstaffe 66

CHAPTER V

THOSE WHO FAVOR A SINGLE TAX ON LAND
Locke, Davenant, Asgill, Cantillon, Wood, Vanderlint ... 71

CHAPTER VI

THOSE WHO FAVOR A MORE ECLECTIC SYSTEM
Walpole, Reynell, Nugent, Hume, Steuart, Stewart, Young . . 79

BOOK II
THE MODERN THEORIES

CHAPTER I
THE PHYSIOCRATIC THEORY

Quesnay, Mirabeau, Mercier de la Riviere, Du Pont de Nemours,

Baudeau, Le Trosne, Turgot ; Franklin, Hamilton 95

CHAPTER II

THE ABSOLUTE THEORY

Adam Smith, Ricardo 113

Table of Contents ix

CHAPTER III
THE EQUAL-DIFFUSION THEORY

FACE

The Optimists.

Verri, Mansfield, Dickson, Young; Canard, Courcelle-Seneuil,
Cherbuliez, Prittwitz, Thiers, De Broglie, Stein ; Montgomery,
Gibbon, Wells, Sherman, Cooley 122

The Pessimists.

Proudhon; Bolles 134

CHAPTER IV
THE CAPITALIZATION THEORY

Young, Craig, Sartorius, Hoffmann, Murhard, Passy, Wolowski,
Destutt de Tracy, Du Puynode, Baxter, Noble, Rau, Schaffle,
Pierson 137

CHAPTER V
THE ECLECTIC THEORY

J.-B. Say, Sismondi, Gamier, Parieu, Du Puynode, Vignes, Leroy-
Beaulieu ; v. Thlinen, Rau, Hock, Prince- Smith ; Jones,
Buchanan, J. Mill, Senior, McCulloch, J. S. Mill, Fawcett,
ClifFe-Leslie 146

CHAPTER VI

THE AGNOSTIC THEORY
Held 161

CHAPTER VII

THE SOCIALISTIC THEORY
Lassalle, Shearman 163

CHAPTER VIII
THE QUANTITATIVE OR MATHEMATICAL THEORY

Cournot, Fauveau, Jenkin, Pantaleoni, Walras, Wicksell, Conigliani,

Barone, Marshall, Edge worth 165

x Table of Contents

PART II

THE DOCTRINE OF INCIDENCE

CHAPTER I
GENERAL PRINCIPLES

PAGE

General considerations 179

Is the commodity durable or perishable? 181

Is the commodity subject to the law of monopoly or that of

competition? 186^

Is the tax general or exclusive? 187

Is there complete mobility of capital ? 187

Is the demand for the commodity elastic? 188

To what extent do differential advantages of production affect the

supply? 192

What is the ratio of product to cost ? 199

Is the tax imposed on margin or on surplus ? . . . .213

Is the tax large or small ? 215

Is the tax proportional or progressive? . . . . .216

Is the commodity a final good ? 217

Conclusions 218

CHAPTER II
TAXES ON AGRICULTURAL LAND

General considerations 220

Taxes on economic rent 222

Uniform taxes according to the quantity or the quality of the

land 224

Taxes on gross product 226

Taxes on agricultural profits 227

Taxes on property or selling value 227

Taxes on rental value 231

CHAPTER III
TAXES ON URBAN REAL ESTATE

General considerations 233

Taxes on the ground owners 236

Taxes on the house owners 238

Taxes on the owners of house and ground .... 244

Taxes on the occupiers 246

Table of Contents xi

CHAPTER IV

K

TAXES ON PERSONAL PROPERTY AND CAPITAL

PAGE

Uniform taxes on capital 260

Unequal taxes on capital 263

1. Incidence as between the original owner and the new pur-

chaser 263

2. Incidence as between the lender and the borrower . . 264

3. Incidence as between the producer and the consumer . . 268

CHAPTER V
TAXES ON PROFITS

Taxes on gross product 270

Taxes on competitive enterprises 271

Taxes on monopolies 273

Ultimate effects 278

Excess-of-tax-above-price doctrine 281

Taxes on gross receipts 285

Under competitive conditions ....... 285

Under monopoly conditions ....... 286

Taxes on net receipts 288

Taxes of fixed amount 292

Application 294

CHAPTER VI
TAXES ON WAGES

Taxes on professional earnings . ' 295

Taxes on ordinary wages ......... 297

CHAPTER VII
OTHER TAXES

Poll taxes 299

Inheritance taxes 299

Excise taxes 300

Import and export duties 300

Stamp taxes 304

Income taxes 307

xii Table of Contents

CHAPTER VIII
CONCLUSION

Optimism and Pessimism

General tendencies ,jj

Advice to legislators

BIBLIOGRAPHY

Works prior to Adam Smith , I7

Works since Adam Smith

INDEX OF AUTHORS

INTRODUCTION

THE problem of the incidence of taxation is one of the
most neglected, as it is one of the most complicated, subjects
in economic science. It has indeed been treated by many
writers ; but its discussion in scientific literature, as well as
in everyday life, has frequently been marked by what Parieu
calls the " simplicity of ignorance." Yet no topic in public
finance is more important ; for, in every system of taxation,
the cardinal point is its influence on the community. With-
out a correct analysis of the incidence of a tax, no proper
opinion can be formed as to its actual effect or its justice. It
is, therefore, time for an attempt to be made not only to pass
in review the theories hitherto advanced, but to contribute
to the solution of some of the theoretic problems while pay-
ing special attention to the practical aspects of the discussion.

A word first as to the terminology. In the process of tax-
ing, we must distinguish three conceptions. First, a tax may
be imposed on some person ; secondly, it may be transferred
by him to a second person; thirdly, it may be ultimately
borne by this second person or transferred to others by whom
it is finally assumed. Thus the person who originally pays
the tax may not be the one who bears its burden in last
instance. The process of the transfer of a tax is known as
the shifting of the tax, while the settlement of the burden on
the ultimate taxpayer is called the incidence of the tax. The
incidence of the tax is therefore the result of the shifting,
and the real economic problem lies in the nature of the
shiftings.

The English language is unfortunately deficient in its
nomenclature. While incidence conveys to the mind the

2 Introduction

notion of the ultimate result of the shifting, we have no
word to express the immediate result of the original imposi-
tion of the tax. "Assessment" of the tax looks upon the
process from above downward ; but we lack a term to charac-
terize the process as seen from below upward. The French
and the Italians have the words percussion, percussione, to
express this idea of the primary result of the assessment.
They, therefore, logically term the shifting of the tax the
repercussion 1 of taxation, the ultimate result of which is the
incidence (incidence, incidenza). But, in using English, we
must content ourselves with the awkward term "original
incidence," while "incidence," when used alone, technically
means the ultimate incidence, or the result of the interme-
diate process. But the incidence the result must never
be confounded, as is often the case, with the shifting the
process.

The shifting of a tax, moreover, must not be confused with
what is known as the evasion of a tax or escape from a tax.
Shifting is the non-payment of a tax through a transfer of
the burden to some one else ; evasion is the non-payment of
a tax without any transfer. A tax may be thrown off entirely
without being shifted to any one. Evasion may be either
legitimate or illegitimate, conscious or unconscious. For in-
stance, through smuggling we have an illegitimate evasion,
but no shifting of the tax. On the other hand, when a new
tax stimulates the improvement of processes of production,
as, for example, the beet-sugar tax in Europe or the whiskey
tax in America at one time, the producer evades the tax to
a certain extent, but does not shift it. This is legitimate eva-
sion. Finally, when there is capitalization of incidence, a
process to be fully explained later, whose main feature is
the fact that under certain circumstances the purchaser of a
taxable object, by cutting down the purchase price, discounts
the tax which he will have to pay, there is practically an

1 They also use the words translation, traslazione, which are the same as our
"transference" or shifting. The French also speak of taxes being "rejetes" our
"thrown off" or "shifted."

Introduction 3

evasion of taxation, but no shifting. In this case the evasion
is unconscious; in both the preceding cases the evasion was
the result of a conscious effort. The distinction between
evasion and shifting has puzzled many writers. We shall
have occasion to revert to it constantly.

The Germans have devised a very elaborate nomenclature
to distinguish the various kinds of shifting ; for example, to
indicate whether a tax is shifted forward from the producer
to the consumer, or back from the consumer to the producer,
or farther on from one consumer to another. 1 Such nomen-
clature is impossible in English. Moreover, not only is it of
little importance, but scarcely any two writers use the terms in
precisely the same way. Above all, the rather fine distinc-
tions have served merely to bring about a confusion between
evasion and shifting.

Another fertile source of error is the distinction between
the shifting of a tax and the incidental burden which
may rest on the shifter. When we consider, for instance,
the shifting of a tax as between buyer and seller, or between
producer and consumer, the question that concerns us is :
Will the price of the article be raised by the imposition of
the tax ? If the price is raised, we say that the tax is to that
extent shifted. But even a complete shifting of the tax does
not necessarily mean an entire absence of loss to the seller.
Thus, it usually happens that an increase of the price of a
commodity leads to a decrease in sales ; and it may happen
that these decreased sales, even at higher prices, may yield
less total profits than before. In such a case, not only does
the buyer pay the tax, but the seller also suffers a loss, even
though the tax has been shifted completely. The study of
shifting, it is evident, concerns itself primarily with the
extent to which a given tax, received by the government, is
divided between the parties in question. It does not seek to

1 The German terms are Abwdlzung, Fortwalzung, Riickiualzung, Weiterwal-
zung, and the general term Ueber-walzung. Their Abw'dlzung is nothing but our
"evasion," and is not a form of shifting at all. Some writers, however, Roscher,
for example, use " Abwalzung " to denote shifting in general. There is no
uniformity in the usage.

4 Introduction

exhaust the problem of the incidental or additional burdens
which may result from the tax.

Finally, we must not confound the incidence with the
effect of taxation. A tax may have a great many effects.
It may diminish industry and impoverish individuals ; it may
stimulate production and enrich individuals; it may be an
unmitigated curse to society ; it may be a necessary evil ; it
may be an unqualified boon to the community regarded as
a whole. With none of these problems does the student of
incidence busy himself. All that he has to investigate is the
question : On whom does the tax ultimately fall ? When we
once know this, we can then proceed to the further discussion
of the effects produced by the pressure of taxation on the
various classes or individuals. The shifting is the process ;
the incidence is the result; the changes in the distribution of
wealth are the effect.

The discussion of incidence thus depends entirely on the
investigation of the shifting of taxation. The real problem
before us is to ascertain the conditions according to which a
tax is shifted onward, backward, or not at all. Only when
we understand whither, why, and how a tax is shifted, can we
discover its actual incidence. In the following pages an
attempt will be made to attack the problem by first giving a
detailed critical history of the doctrine, and then taking up
the positive theory itself. In the second part it will be con-
venient to begin with a statement of some general principles,
to follow this with a consideration of the chief separate taxes,
one by one, and to close by drawing the general conclusions
applicable to the science of public finance.

PART I

THE HISTORY OF THE DOCTRINE OF
INCIDENCE

GENERAL SURVEY

THE writers on the shifting and incidence of taxation, 1 like
those on almost all other economic topics, may be broadly
divided into two classes, marked off from each other by the
period in which the theory of distribution was formulated by
the Physiocrats and Adam Smith. The doctrine enunciated
by the first class of writers almost exclusively English
may be summed up under the head of " The Early Theories."

The English literature on taxation, prior to Adam Smith,
begins at about the middle of the seventeenth century. For
somewhat more than a hundred years, the theories on the
incidence of taxation are found, with a few important excep-
tions, in occasional pamphlets written to advocate or to
oppose practical measures of reform. It was not until a few
decades before Adam Smith that a consideration of the gen-
eral theory of incidence assumed a more prominent place
in the treatises on economic topics. The propositions of the
statesmen as well as of the pamphleteers of the earlier period
rest, however, on more or less definite theories of incidence.

1 The only works which contain a history of the theory of incidence are the
German works of J. Kaizl, Die Lehre von der Ueberwalzung der Steuern, 1882,
and G. v. Falck, Kritische RUckblicke auf die Entwickelung der Lehre von der
Steueriiberwahung seit Adam Smithy 1882. Both these works deal only with the
modern theories, and even for this period they are inadequate. Whole classes of
authors are omitted, among them some important ones. Each work is chrono-
logical, and makes little attempt to analyze the theories according to schools.
Falck is richer in the account of the early German writers. Kaizl is better ac-
quainted with several of the French authors, although he omits some of the most
noteworthy. Both neglect the English authors, with the exception of Smith,
Ricardo and Mill, and ignore the Continental and American writers. Falck is
almost without any positive ideas at all, while Kaizl adheres so closely to one
or two German predecessors that his own constructive work is slight. Both
books are, however, to be recommended as the only ones that we possess on the
subject. The abler work, originally written as a doctor's dissertation, is that of Dr.
Kaizl, who has since then attained a prominent position as professor in the Uni-
versity of Prague, and as author of numerous economic treatises in Bohemian, and
who now (1898) occupies the post of Minister of Finance in the Austro-Hungarian
monarchy.

7

8 General Survey

It may conduce to clearness to classify these pioneers accord-
ing to their practical inferences from the doctrine of inci-
dence. From this point of view, the writers before Adam
Smith may be divided into six categories, as follows :

1. Those who discuss the general excise.

2. Those who favor a single tax on luxuries. 1

3. Those who favor a single tax on houses.

4. Those who favor a general property tax.

5. Those who favor a single tax on land.

6. Those who favor a more eclectic system.

This whole field of economic inquiry has thus far been so
little cultivated, and many of the works referred to are now
so rare that it may be wise to treat this section of the history
more fully than would otherwise be permissible in a work
which pretends to give only a general sketch of the historical
development of the doctrine of incidence.

The views developed in the period subsequent to the
Physiocrats and Adam Smith, which will be discussed in
Book II. under the title of " The Modern Doctrines," are
somewhat more difficult to subdivide with accuracy; for it
is not always easy to draw the line sharply between writers
many of whom have much in common. Nevertheless, their
theories of the incidence of taxation may be conveniently
classified as follows :

1. The Physiocratic theory.

2. The Absolute theory.

3. The Diffusion theory.

(a) The Optimistic theory.

(b) The Pessimistic theory.

4. The Capitalization theory.

5. The Eclectic theory.

6. The Agnostic theory.

7. The Socialistic theory.

8. The Quantitative or Mathematical theory.

1 The word "single" is not here used in opposition to "double." The phrase
denotes a general tax on luxuries as the exclusive tax.

BOOK I

THE EARLY THEORIES

rn*z

t UNIVERSITY

V

-

CHAPTER I
THOSE WHO DISCUSS THE GENERAL EXCISE

BY the term "excise" is meant a tax on commodities,
levied on the producer or the domestic dealer. It is distinct
from customs duties which are levied on the importer ;
although, after commodities have once been imported, an
internal duty or excise may also be levied on them. These
internal taxes or excises are popularly supposed to be shifted
to the consumer and, accordingly, while they are imposed in
first instance on the producer or dealer they are commonly
classed as indirect taxes on consumption. The English
publicists, however, were by no means unanimous in accept-
ing this popular view. We may, in fact, distinguish no less
than four different theories as to the incidence of the excise.
These theories are :

1. That, while the excise is at first shifted from the dealers

to the consumers, it will not finally rest on the poor
consumers.

2. That the excise will rest on consumers in general.

3. That the excise will be shifted to the landowners.

4. That the excise will finally rest on the dealers or traders.

The earliest writers to propose a system of excises did not
look much farther than the surface fact that the excise was
a tax on a consumable commodity, and therefore presumably
a tax on consumption. Their ideal was a tax on expenditure,
and this ideal, in their opinion, could be most easily attained
by a general excise. Although this project was a favorite
one with many of the early authors, it gradually met with
opponents as well as with adherents until, under Walpole, it

ii

12 Shifting and Incidence of Taxation

became, in the second quarter of the eighteenth century,
the subject of a fierce controversy. 1

The first English writer to posit expenditure as the basis
of taxation was Hobbes, in a work written shortly after the
imposition of the first excise in 1643. Hobbes, like many
of the later continental tax reformers, held a tax on expense
to be a logical corollary of the doctrines of equality and
universality of taxation. To tax property, he thought, would
be to discourage thrift and to put a premium on extrava-
gance ; while, since everybody consumes something, a tax on
expense cannot possibly be evaded like so many of the other
taxes. 2 The scheme of the excise itself was soon adopted by
several writers. Thus Cradock states that "the Generall
Excise (so much decryed and Petitioned against) in its
proper Constitution, is the most equitable of Impossitions :
no man being charged with it, but he that sels it for profit,
to the consumption of the Commodity, who in truth pays it

1 Those who care to go into the literary history of the controversy over the
famous " excise-scheme," which was in reality no scheme for a general excise at
all, are referred to the monographs of Leser, Ein Accisestreit in England,
Heidelberg, 1875, anc * f Ricca-Salerno, Le dottrine finanziarie in Inghilterra
tra la fine del secolo XVII e la prima meta del XVIII, Bologna, 1888. A list
of additional contemporary pamphlets may be found in the bibliography printed
by Sinclair, History of the Public Revenue of the British Empire, 3d ed., 1804,
vol. iii, appendix, pp. 94-136. Many of the monographs discussed by Leser
and Ricca-Salerno do not dwell on the question of incidence. So far as they do
discuss the subject, they, as well as other works of the same period not mentioned
by the German and Italian writers, will be considered in the following pages.

2 " The Equality of Imposition consisteth rather in the Equality of that which
is consumed, than of the riches of the persons that consume the same. For what
reason is there, that he which laboureth much, and sparing the fruits of his labour,
consumeth little, should be more charged, then he that living idlely, getteth little,
and spendeth all he gets; seeing the one hath no more protection from the
Common-wealth then the other ? But when the Impositions are layd upon those
things which men consume, every man payeth Equally for what he useth : Nor is
the Common-wealth defrauded, by the luxurious waste of private men." Levia-
than, or the Matter, Forme, and Power of a Common-wealth Ecclesiasticall and
Civill. By Thomas Hobbes of Malmesbury, London, 1651, chap. 30, part 2,
p. 181 (reprint of 1881, p. 270). For a fuller statement of the benefit theory of
taxation on which this passage is based, see Seligman, Progressive Taxation in

Theory and Practice, 1894, pp. 87, 88.

Those who discuss the General Excise - 13

insensibly without Complaint." * Another writer in speaking
of the Dutch excise regards it as " certainly the most equal
and indifferent tax in the world, and least prejudicial to any
people." 2 So familiar indeed did the system become that
Culpeper was able to state : " It hath alwayes been a received
Maxim, That our meer Consumption can scarce be too heavily
excised." 3 And in another passage he remarks that : " Do-
mestick Excise in a thriving State hath no fellow, it carries
no Compost from the Soyl, and even the Labourer pays it
cheerfully when work is quick." 4

The excise, however, did not exist long before the pam-
phleteers began to have more decided views as to its inci-
dence. Thus began the differences of opinion, which we
shall now proceed to explain.

I. The Excise does not rest on the Poor Consumers

The first economist to express any decided opinion on the
incidence of the excise was the famous advocate of the Mer-
cantilist theories, Thomas Mun. He discusses the tax systems

1 An Expedient for Regulating the Customes and Excise. Approved by divers
well affected Marchants, and others of the Citty of London. By Francis Cradock.
Marchant. London, 1659, p. I.

2 England"* 's Interest Asserted in the Improvement of its Native Commodities ;
and more especially the Manufacture of Wool. By a true Lover of his Majesty
and Native Country. London, 1669, p. 33.

3 A Discourse shewing the many Advantages -which will accrue to this Kingdom
by the abatement of USUR Y, together -with the Absolute necessity of Reducing Interest
of MONE Y to the lowest rate it bears in other Countreys, That, at least, we may
Trade with our Neighbours upon Equal Termes. Humbly presented to the High
Court of Parliament now Sitting. By Sir Tho. Culpeper, jun. Kt. London, 1668,
p. 3. The title of the work explains why Culpeper follows up the passage in the
text by the admonition : " Then tax Usury, there is no Consumption like it; Excise
the Excise-man, for Usury is the grand Excise upon our Land and Trade."

4 Ibid., p. 2. Culpeper is opposed to any further taxation of land, and expresses
himself vigorously as follows :

" Can the Land bear it? Surely No, if it be not limited to the present distress,
and sweetened with some Recompense : Alas ! Land is at its last Gasp, and
ready to give up the Ghost, without a powerful Cordial : Most Parishes can
already present some Farms wholly deserted, Neither Tenant being willing to hire,
nor Owner able to stock them; Many stocked but two halfs, most to loss : Be-

14 Shifting and Incidence of Taxation

of Italy and Holland, and finds their essence to consist in
" a custom on all new wares transported, customs upon every
alienation or sale of live Cattel, Lands, Houses, and the por-
tions or marriage mony of women, license mony upon all
Victualling houses and Innkeepers, head money, Custom upon
all the Corn, Wine, Oyl, Salt and the like, which grow and
are consumed in their own dominions." Now all these seem
to be " a rabble of oppression to make the people poor and
miserable." * But Mun declares this to be a mistake. For in
proportion as the necessaries of life increase in price, the rate
of wages must rise also. In the long run, therefore, the taxes
on the poor will be shifted to the employers, and through
them to the rich consumers of manufactured articles. 2 This
is a good thing, because the rich will thus be " forced to abate
their sinful excess and idle retainers." 3 Mun's idea, it is
plain, is that taxes on consumption are to be commended
because they will be shifted to the employing producer ; or,
at all events, that they must not be regarded as falling on the
consumption of the mass of the community.

Other writers furthered the doctrine that the excise did
not rest on the mass of consumers by advocating the wider
theory that taxes in general are really no burden. Thus,
Waterhouse maintained that " money raised upon the poorer
sort, returns to them again " in the shape of increased em-
sides, Land is like the heart, from which all the other Members must receive their
Life and Vigour; Great reason therefore have we to cherish our Land, unless we
will reduce our selves to the state of a meer Colony; which would manifestly end
in our Desolation and Conquest."

1 England* s Treasure by Forraign Trade, or, the Ballance of our Forraign
Trade is the Rule of our Treasure. By Thomas Mun. 1664, chap. xvi. : " How
the revenues and incomes of princes may justly be raised," pp. 151, 152.

2 "Neither are these heavy Contributions so hurtfull to the happiness of the
people, as they are commonly esteemed : for as the food and rayment of the poor
is made dear by Excise, so doth the price of their labour rise in proportion;
whereby the burden (if any be) is still upon the rich, who are either idle, or at
least work not in this kind, yet have they the use and are the great consumers of
the poors labour." Ibid., p. 154 (p. 89 of the reprint of 1895 in Ashley's Series
of Economic Classics}.

Ibid., p. 155.

Those who discuss the General Excise 15

ployment or higher wages, and that a tax must be looked
upon as a loan, the proceeds of which soon come back to the
taxpayers. 1 Another writer laid down the proposition that
" Impositions upon a People make them thrive," 2 and that
"Taxes are no Charge either to the Kingdom in general, or to
particular Persons; but on the contrary a Gain to all." 3 His
chief arguments to prove this assertion are, first, that since
taxes are employed on court or for war they make money
circulate, and, secondly, that "the poor are employed by
Taxes, and are by that means taken off from being a Charge
to the Kingdom." 4 The author goes even farther than
Waterhouse; for while the 'latter contented himself with
calling taxes a species of loan, the former maintains that they
ought properly to be regarded as the poor man's bank, which
supports him in distress. 5 Of all taxes, none appears to him
so good as the excise, " which indeed seems of all Taxes the
most equal : for that no man by it can be said to be oppressed,

1 " What money the people bestow upon his Majesty in Leavies and assess-
ments, his Majesty returns to his people in wages, pay, exchange and Merchan-
dize, what he receives for his care, he payeth them for their Labour; what is paid
to his Exchequer is returned to their Markets : there is a circle in the veine of Gold
and Silver as in that of blood. . . . This money is not lost, but lent. . . . What
the Gentry take from you with one hand, they give you with another; what their
power ruling over you calls for in contribution, their goodness in employing you
bestows upon you in wages." One Tale is good, until another is told, or, Some
sober Reflections upon the Act for Chimney -Money. Drawn up for the Use of
some Neighbors, and thought usefull to be communicated to the good people of this
NATION. By William Waterhouse, Esq., London, 1662, pp. 29, 30.

2 Taxes no Charge : in a Letter from a Gentleman, to a Person of Quality e
Shewing the Nature, Use, and Benefit of Taxes in this Kingdom ; and compared
with the Impositions of Foreign States. London, 1690, p. 5.

8 Ibid., p. 9.

* Ibid., p. 13. Additional reasons are that "the worst members in the Com-
monwealth (viz.) the Extravagant and Debauch'd" really pay the taxes, and
that so far as taxes consist of customs duties, they "Keep out a Destructive
Trade."

6 " 'Tis a vulgar error to believe that Taxes, even to the meanest Man is a
Charge, for that his Mite is with increase return'd by the expence of that which
would never have seen day, but by the force of a Law; so that publick Taxes, ex-
pended in our own Country, may be accounted the poor and the Mechanick's bank,
by which they are employed, and maintained." Ibid., pp. 17, 18.

1 6 Shifting and Incidence of Taxation

he being his own Assessor, and pays but what he pleases,
according to his Expence." l

Another anonymous pamphleteer of the same period agrees
that " Excises are the most equal and less grievous Tax of
all others," and believes that a moderate tax will not be felt
to such an extent as to hinder consumption at all. 2 " Who
would ever use the less Sugar, if one peny Excise were paid
out of twelve peniworth ? Who would use the fewer Ribbons,
for 2d. Excise upon every I2d. ? Who would play the less
at Cards or Dice, if 3d. were paid out of I2d. ? What Lady
.would ever forbear to wear Pearls or Diamonds, or to buy
Fans and Looking-Glasses, if 4d. were laid upon every I2d. ? "
Our author's confidence in the harmlessness of a tax amount-
ing to one-third of the value of a commodity would, perhaps,
not be shared by many of the present day.

These views of Mun and his successors as to the virtual
immunity of the mass of consumers from the weight of taxa-
tion did not, however, make much headway. During the
following decades the opinion, to be discussed in the next
section, that the excise was a real burden on the poorer con-
sumers, gradually gained ground. But toward the middle of
the eighteenth century, isolated writers reverted to the theory
of Mun. Of these, none is more remarkable than Fauquier.
He gives a most lucid and vigorous argument, designed to
show that a tax on the workingman, whether a direct tax on
wages or an excise on the necessaries of life, will inevitably
be shifted from his shoulders. Fauquier puts his general
principle as follows : " The Poor do not, never have, nor ever
possibly can, pay any Tax whatever. A man that has noth-

1 Taxes no Charge, p. 25. Although the author opposes the benevolences,
monopolies, alterations of money and taxes on polls, offices and travellers, he sug-
gests a supplement to the general excise through taxes on Jews, playhouses and
" the Vermin of the Nation, lewd Persons of both Sexes." It is no wonder that
he confesses in another place : " thus I have huddl'd together a mixt Discourse."
Ibid., p. 19.

2 A familiar Discourse between George, a true-hearted English Gentleman,
and Hans, a Dutch Merchant : Concerning the present Affairs of England.
London, 1672, pp. 37, 38.

Those who discuss the General Excise 17

ing can pay nothing." 1 He proceeds on the assumption
that wages are always at the bare minimum of subsistence.
If the laborer, therefore, can no longer live on his usual in-
come, whether this condition be due to an increase in the
price of necessaries or to a forcible diminution of his wages
through a tax, his nominal wages must rise in proportion. 2
In fact, Fauquier believes that in many cases his wages will
rise more than in proportion to the tax. But this he does not
attempt to prove. He does, indeed, try to show that when a
tax is imposed on the producer or the seller of commodities,
a sum over and above the tax will be shifted to the pur-
chaser. 3 But even if this conclusion were valid as to profits,
the reasoning would not be applicable to wages. However
this may be, Fauquier is quite positive that taxes rest only on
the rich consumer, "that is, the Man of Fortune who lives on
his Income." And this is true, "even in those Taxes which
are said mostly to affect the Poor, and which they seem, at
first Sight, to pay out of their own Pockets." 4

Fauquier, indeed, differed from Mun in his practical con-
clusions. For while Mun advocated the general excise, Fau-
quier opposed it on the ground that the same result that

1 An Essay on Ways and Means for raising Money for the Support of the
Present War, without increasing the Public Debts. By F. F. (Fauquier), Lon-
don, 1756, p. 17. "This is universally true in all Countries," he adds, "at all
Times, and equally so, whether Provisions are dear or cheap. I have heard, that
in India a man can live for one Penny a Day; this then will be nearly the Price
of Labour in that Country."

2 " If by Taxes, or Dearth, or any other Cause, the common Necessaries of Life
become so dear, that a Labourer cannot live at the usual Wages; the Price of
Labour must, and in Fact actually does, rise in Proportion thereto at least, gen-
erally much more." Ibid., p. 18. "If Taxes are laid on Labour meerly, or on
such Articles as the meanest Labourer must want and use, he will still live, and
his Wages must be raised." Ibid., p. 20.

3 " If [taxes are laid] on the Manufacturers, or Venders of Goods, they will
raise the Prices of the Commodities they respectively deal in, sufficient not only to
pay the Tax, but to make them full amends for the Money they disburse for the
Payment of it, and then always make a third Addition to bring the Price to a
round or even Sum. So that the whole Tax, and much more, is ultimately paid
by the Consumer." Ibid., pp. 19, 20.

* Ibid., p. 20.
c

1 8 Shifting and Incidence of Taxation

of taxing expense might be more conveniently attained in
another way. 1 The point of interest to us here, however, is
that both writers agreed in the belief that an excise would
not rest on the poor consumer, but would be shifted to the
employer, and that if we can speak of an excise resting at all
on the consumer, it is the rich consumer that is meant. This
doctrine was later accepted by Sir James Steuart 2 and be-
came a part of the classical doctrine, as elaborated by Adam
Smith and Ricardo.

2. The Excise rests on Consumers in General

By far a majority of the writers believed that the excise
rested on the mass of consumers in general, irrespective of
the fact whether they were poor or rich. This broad
theory was ushered in by the famous economist and statisti-
cian, Sir William Petty. Petty also has the distinction of
being the first English writer to devote an entire work to the
subject of taxation. 3 It will repay us, therefore, to dwell
somewhat more fully on the general theory of incidence that
is found in his book.

Petty first discusses the procuring of revenue from land,
which he says can be done in two ways, either by " setting
apart a proportion of the whole Territory for Publick Uses,"
or by " an excision of the land by way of assessment or land
taxe." Such a land tax, where "an aliquot part of every
Landlords Rent were excinded or retrenched," is good in a
new country, where a certain quit-rent is reserved beforehand,
because it will be borne partly by the landlord, but also partly
by the consumers. For "it is not onely the Landlord pays,
but every man who eats but an Egg, or an Onion of the
growth of his Lands ; or who uses the help of any Artisan,
which feedeth on the same." 4 In old countries, like Eng-
land, he continues, where rents are fixed for a long time, such

1 See below, p. 62.

2 See below, p. 88.

8 A Treatise of Taxes and Contributions. [By William Petty.] London, 1667.
4 Ibid., p. 20.

Those who discuss the General Excise 19

a tax would be unjust, because it would benefit only the land-
lords who renew their rents. These gain doubly, " one way
by the raising of their Revenues, and the other by enhansing
the prices of provisions upon them." For the tax " doth ulti-
mately light upon the consumptioners," or, as he again puts
it, a " Land-taxe resolves into an irregular Excize upon Con-
sumptions, that those bear it most, who least complain." 1

Petty also discusses the house tax or "an Excisium out of
the Rent of Houseing." He deems the influence of this much
more uncertain than that of land, "for an House is of a double
nature, viz. : one, wherein it is a way and means of expence ;
the other, as 'tis an Instrument and Tool of gain. . . . Now
the way of a Land-taxe rates housing, as of the latter nature,
but the Excise as of the former." 2 From which it may be
inferred that Petty thinks a house tax will be shifted to the
consumer or occupier, and will be shifted further on to con-
sumers when the occupier himself is a producer.

In regard to " customs," both " outwards " and " inwards,"
Petty assumes that they will be shifted to the consumers, and
concerns himself primarily with stating the principles on
which they should be levied. His chief objection to customs
duties is that they are frequently imposed on articles which
serve as the raw materials for further production, or, as he
puts it, " that Duties are laid upon things not yet ripe for use,
upon Commodities in fieri, and but in the way of their full
improvements." 3 Poll-money, which he opposes because of
its inequality, 4 he thinks cannot be shifted. He concludes
that a general excise is the best of all taxes, and assumes
that, while it will be transferred to the general consumer, it
cannot be shifted any further. In this respect it is superior

1 A Treatise of Taxes and Contributions, p. 21.

2 Ibid., p. 21.

8 Ibid., p. 36. " This," he later adds, " is the reason why I think the Leavy
we commonly call Customs to be unseasonable and preposterous, the same being
a payment before consumption." Ibid., p. 70.

4 Petty grows very indignant over the English system : " so as by this Confu-
sion, Arbitraries, Irregularities, and hotch pot of Qualifications, no estimate could
be made of the fitness of this Plaister to the Sore." Ibid., p. 41.

2O Shifting and Incidence of Taxation

to the land and house taxes ; for these, as we have seen, are
only partially shifted to the consumer.

Petty's views on the general property tax are interesting as
showing in this, the first book on the theory of taxation, a
recognition of the defects of the system which was gradually
coming to its close in England. After recounting the many
defects and abuses connected with the system, 1 he closes
with the statement : " I have not patience to speak more
against it : daring rather conclude without more ado, in the
words of our Comick to be naught, yea exceeding naught,
very abominable, and not good." In another work, how-
ever, Petty seems still to pin some faith on the chance of
reaching personal property. 2

This is not the place to discuss Petty's many reasons for
favoring expenditure as the basis of taxation. 3 It will suffice
for our purposes to state that, starting out from the principle
that a tax on expense is the ideal form of taxation, Petty ad-
vocates the general excise as reaching this result most surely
and most speedily. He discusses the plan of levying a
single tax on some one object of expenditure, termed by him
the "Accumulative Excise" or tax "upon some one single
particular," which may be deemed " to be nearest the com-
mon standard of all Expense." But he prefers the scheme
of levying a tax upon " every particular Necessary, just when
it is ripe for Consumption." 4 Still, as he himself sees that

1 " There have been in our times, ways of levying an aliquot part of mens Es-
tates, as a Fifth, and Twentieth, viz. of their Estates real and personal, yea, of their
Offices, Faculties, and imaginary Estates also, in and about which way may be so
much fraud, collusion, oppression, and trouble, some purposely getting themselves
taxed to gain more trust : Others bribing to be taxed low, and it being impossible
to check or examine, or trace these Collections by the print of any footsteps they
leave (such as the Hearths of Chimney are)." A Treatise of Taxes, pp. 61, 62.

2 He hazards the conjecture that " assessments upon personal estates, if given
in as elsewhere upon oath, would bring that branch which of itself is most dark to
a sufficient clearness." Verbum Sapienti; or . . . the Method of raising Taxes
in the most equal manner, p. 17 (Appended to his Political Anatomy of Ireland,
edition of 1691). Cf. Seligman, Essays in Taxation, p. 48.

3 They may be found in chap. xv. of A Treatise of Taxes.

4 This he terms " the very perfect Idea of making a Leavy upon Consump-
tions." Ibid., p. 69.

Those who discuss the General Excise 21

this may be "too laborious," Petty suggests as an alternative
scheme that "we ought to enumerate a Catalogue of Com-
modities, such whereof accompts may be most easily taken,"
but " being withall such, as are to be as near Consumption as
possible."

The views of Petty gradually diffused themselves through-
out the community, keeping pace with the ever-widening use
of indirect taxes on consumption. Many of the writers of the
close of the seventeenth century now became ardent advocates
of the general excise. The author of an interesting pam-
phlet, after giving a definition of excise, 1 proceeds to explain
that, although the " makers or Factors " of commodities ad-
vance the money, they really shift the tax to the public with-
out the latter being aware of it. This constitutes, in his eyes,
the great advantage of the excise ; for if the tax were imposed
directly on the consumers, it would give rise to great com-
plaint. 2 The author is very careful, however, to emphasize
the necessity of taxing only those articles which are neces-
saries of life and in universal use. In this way, he asserts,
not only will the revenue be large, but the principle of uni-
versality of taxation will be carried out. 3

The same belief in the excise, on the score of its reaching

1 " When we speak of an Excise, we mean . . . the whole Duties of any kind
whatsoever, that are charged upon any Goods or Commodities expended within
the Kingdom." A Discourse (by way of Essay) humbly offered to the Considera-
tion of the Honourable House of Commons, towards the Raising Moneys by an
Excise, demonstrating the Conveniency of Raising Moneys that Way. By W. C.,
Esq. London, 1695/6, p. 3.

2 "The Money being deposited by the Makers or Factors who take it again, in
the Price of them, at the Sale, the People pay it insensibly in the Value of the
Goods they buy; for we must not think that the Merchants or Traders pay all the
Money of the Customs and Excise ; they are but the Depositors of it, and the Peo-
ple paying it in a way so secret and insensible, it meeteth not with any Contradic-
tion from them, as it would do, were they themselves to lay down the present
money." Ibid., p. 4.

3 This plan is "that whatsoever Commodities be made Excisable, are to be of
a large, universal and necessary Expence : Of a large Expence, otherwise, there
will be a great Noise to little Purpose. If it be of an Universal Expence, then
every Man will bear his Lot. If it be of Necessary Expence, there will be no
avoiding the Use of that Commodity." Ibid., p. 8.

22 Shifting and Incidence of Taxation

the entire mass of the consumers, is found in the work of
Burnaby, who advocated an extension of some of the internal
duties on commodities. His particular scheme was the im-
position of a tax on malt, which in his opinion " will be less
felt than usually Taxes are, by reason every Person will pay
Proportionable in the Price of Malt." 1 He lays down his
general principle as follows : " The more universal any Tax
is, it is to be supposed (unless in some Particular Cases) to be
the more equal." Then follows the minor premise : " I pre-
sume, no Person will deny that such a Tax will prove so uni-
versal, that not any Person will escape paying his Proportion
according to his consumption." From all of which it is easy
to draw the conclusion that "no Person can complain; who
Consumes little, will have but little to pay."

Another writer, commenting upon some of Petty's state-
ments, puts very forcibly the case for the general excise, of
which he says, " I must allow, 'tis, singly considered, perhaps
the most equal, and Innocent of any particular way of Taxing,
commonly proposed or discoursed of." 2 Not only is every
man, he thinks, his own assessor, but the tax is paid by the
final consumer almost unconsciously; it conduces to thrift,
and it spares the land, which is the real source of public
wealth. 3 Nevertheless he is alive to some of its shortcom-

1 Two Proposals, Humbly Offered to the Honourable House of Commons, now
assembled in Parliament. I. That a Duty be laid on Malt, in the stead of the
present Duty on Beer and Ale. II. That a Duty be laid on Malt, and the pres-
ent Duty on Beer and Ale be continued. By A. Burnaby, of the Middle-Temple,
Gent. London, 1696, p. 2. Cf. p. 24. Much the same idea is contained in
another pamphlet by Burnaby, entitled : An Essay upon the excising of Malt, as
also the present Case of Tallies considered. London, 1696.

2 "Excepting," he adds, like all the writers of the time, "Imposts on some
Forreign hurtful Superfluities, for the due regulating of Trade." A Letter from a
Gentleman in the Country to his Friend in the City: touching Sir William
Petty 1 s Posthumous Treatise ; entituled Verbum Sapienti, etc. London, 1691, p. 14.
This tract has sometimes been ascribed, but probably without good reason, to
Sir Thomas Culpeper.

3 " It hath a notable Air and Aspect of Freedom, every one being indeed his own
Assessor : It rises almost insensibly, bringing the Multitude (who are more apt to
murmur at integral Taxes), without much Grudging, to pay their Quota's in this.
It affects not immediately the Fund of Land, as our sole Land-Taxes mischievously

Those who discuss the General Excise 23

ings, 1 and queries whether the object of relieving the land
from excessive taxation may not perhaps be more conven-
iently attained in another way. 2

A considerable number of other writers, who believed that
the excise would be shifted to the mass of consumers, now
began to express their doubts as to the beneficence of the
tax in general. Several went no further than to criticise the
rate of the tax, admitting the validity of the principle of
the excise, but desiring necessaries to be taxed at a lower
rate. Thus Sheridan contends that "the Excise, if equally
imposed, were the best and easiest of all taxes," 3 and ad-
vances the usual arguments in its favor. 4 But in discussing
some of the special excises, such as the beer-tax, he main-
tains that they should have been levied on the richer classes,
rather than on the workingman. 5 It is perhaps his uncer-
tainty as to the real benefits of the excise that leads him to
propose as a possible, but novel, substitute a tax on bache-

do : And so powerfully doth it recommend, indeed preach Frugality, that, to say
the truth, It in a manner condemns all Unthrifts, as meer Ideots or Lunaticks."
Ibid., p. 14.

1 "Excise, you know, hath obtained a current Repute of perfect Equality:
Now I by no means admit of that ; not only Niggards, but all those whose Condi-
tion obliges them not to live Honourably upon their Demeans, at pleasure avoid-
ing it."

2 See below, p. 68.

8 A Discourse on the Rise and Power of Parliaments, of Laws, of Courts of
Judicature, of Liberty, Property, and Religion, of Taxes, Trade and of the
Interest of England in Reference to France. In a Letter from a Gentleman in
the Country to a Member of Parliament. [By Thomas Sheridan.] London,
1 677, chap, xiii, " of Taxes." Reprinted as a separate volume in Some Revelations
in Irish History ; or, Old Elements of Creed and Class Conciliation in Ireland.
Edited by Saxe Bannister. London, 1870.

* ** It ought to be laid upon all things ready to be consumed. This puts it into
the power of every man to pay more or less, as he resolves to live loosely or thrift-
ily; by this course no man pays but according to his enjoyment or actual riches,
of which none can be said to have more than what he spends; true riches con-
sisting only in the use." Ibid., p. 172.

5 "To speak the truth in good conscience, this branch ought to have been
imposed on the nobles and estated-men rather than on the artificer and
labourers, who were very slenderly concerned in the grounds of it." Ibid.,
P- '73-

24 Shifting and Incidence of Taxation

X*

lors. 1 In much the same spirit the author of the celebrated
Britannia Languens^ advocates an excise primarily on the
superfluities of the rich, and maintains that if excises are
levied on ordinary necessaries at all they must be very low
ones. 3 A little later we find the view that high excises are
clearly pernicious, and that revenue should be derived rather
from "small excises" on commodities which had hitherto
escaped taxation. 4 Finally, the growing belief that high
excises would ultimately affect the consumer led some writers
to advocate particular kinds of excises for the precise pur-
pose of diminishing extravagant consumption. A good ex-
ample of this is the proposal to tax bricks in order to check
the growth of London at the expense of the rural districts. 6

1 "I have thought of a sort of tax which I believe is perfectly new to all the
world. ... It is a tax upon celibate, or upon unmarried people, viz. : that the
eldest sons of gentlemen, and other degrees of nobility upwards, and all other
persons not married by the times limited as aforesaid [from twenty to twenty-five
years of age], shall pay per annum a-piece these following rates, etc., etc. ; and
all married men not cohabiting with their wives to pay quadruple." A Discourse
on the Rise and Power of Parliaments, pp. 177, 179.

2 Britannia Languens, or a Discourse of Trade : shewing the Grounds and
Reasons of the Increase and Decay of Land-Rents, National Wealth and Strength,
etc. London, 1680.

8 " But since I have now, and before mentioned Excises, and have observed
some men of Parts, almost to startle at the naming of a new Excise, I shall thus
far explain and vindicate myself, and the proposal : First, I shall agree that such
Excises as affect and over-burthen the beneficial parts of Trade, are of pernicious
Consequence. Secondly, that an Universality of Excise is both inconvenient and
unnecessary; but that there may be Excises Imposed on many Superfluities, and
Excesses, in Meats, Drinks, or Equipages, or upon some imported Goods Con-
sumed at home, which would be no prejudice to any kind of Trade; being no clog
upon our Exports, or Re-exports ; or perhaps, a very small Excise on ordinary
Meats, Drinks, and Apparel, might be supportable." Ibid., p. 294.

4 " High Customs and Excises are great Obstructions to Trade. . . . This
Grievance might be redressed by moderating the excessive Duties, and making the
Excises more universal." The author therefore proposes " a new Fund by small
Excises on Things which have not been yet Taxed." A Proposal for the Payment
of the Publick Debts, and an Account of some Things mentioned in Parliament
on that Occasion. London, 1714, p. 20.

5 " The Duty on Bricks and Tiles may give a seasonable Check to the wanton
and extravagant Humour of Building, particularly about this Metropolis, whereby
the Head is likely to grow too big for the Body." Animadversions and Obser-

Those who discuss the General Excise 25

The authors hitherto discussed, holding to the doctrine
that a tax on the producer or dealer is shifted to the con-
sumer, all agree that excises are desirable, although they
differ somewhat in the intensity of their desire for such a
method of revenue. But we now meet with a class of writers
who hold the same theory of incidence, while at the same
time they strenuously object to all excises, precisely because
they fall on the consumers. They accept the doctrine that
excises are shifted to the consumer, but they do not believe
that the consumer ought to be saddled with the entire load.
We meet with this objection to excises very shortly after the
inauguration of the system. 1

The growing opposition is well reflected in a Scotch pam-
phlet written at the beginning of the eighteenth century, in
which a melancholy picture of the future of the kingdom is
traced, and the gradual pauperization of the whole com-
munity is predicted. 2 But it was especially at the time of
Walpole's excise scheme that this opinion as to the perni-

vations upon a Treatise entituled Some Calculations and Remarks relating to the
present State of the publick Debts and Funds . . . by Archibald Hutcheson . . . to
which is added a New Proposition to raise Money for the Use of the Publick.
Humbly submitted to the Consideration of both Houses of Parliament, etc. Lon-
don, 1718, p. 47. The author joins to this recommendation, a proposal for a tax
on plate.

1 One of these early writers expresses himself very vehemently, as follows:
"That the Excise of Ale, Beer, Perry, and Syder, and the charges, affliction, and
troubles, which it brings upon the people, which before our times of misery,
would have brought death and ruine any private contriver; and was at the first
created by Oliver and his Impes to maintain a cursed Rebellion, and set up a
destroying and detestable Anarchy, may be abolished, and taken away, and the
Nation restored to the freedom and quiet which they formerly enjoyed under this
our ancient and excellently composed Monarchy." Restauranda : or the Neces-
sity of Publick Repairs, by setling of a certain and Royal yearly Revenue for the
King. [By Fabian Philips.] London, 1662, p. 95. A still earlier fulmination
was : A Declaration against the illegal, detestable, oft condemned new Tax and
Extortion of Excise in general, and for Hops (a native uncertain commodity} in
particular. By William Prynne, Esq. London, 1654.

2 " Our Merchants are the first Advancers of the Taxes that are upon Trade,
but they are refounded with double Interest by the Noblemen and Gentlemen,
who for the most part consume all the valuable Goods Imported.

" Our Peers and Barons, may easily judge, how far they will be able to make

26 Shifting and Incidence of Taxation

cious effects of the excise was expressed with great energy. 1
Some of the writers, however, who were then quite willing
to abandon consumption as the general fiorm of taxation,
based their opposition to excises primarily on the ground
that the tax falls with greater severity on the poorer con-
sumer, and that it is to be reprehended for this reason.

One of the earliest authors to show this defect in the
excise is Gary. He starts out with the general proposition
that the tax system must be so contrived " that the Poor bear
little or none of the Burthen, their Province being more prop-
erly to labour and fight than pay." 2 Not only does a man
who works for his income part with it with reluctance, says he,
but the revenue accruing to the government from these small

any Consumpt of these Goods, or pay what they get, when there is not only Taxes
on their Land, but on the Product of their Land, viz. their Malt, Beer and Ale.

" Our Burgesses may soon consider, that when the Peers and Barons have no
Money, their Trade must decay.

" Our Mechanicks will have no difficulty to believe, that if there be no Trade,
and no circulation of Money, their best Trade will be a Plantation Trade.

" And in the last place, when our Commons buy such dear Ale, pay so much
Tax on Salt, have nothing or a very small Price for the Fruit of their Labour;
they will never be in a Condition to pay their Farms; so in place of Riches, Pov-
erty will soon circulate among us." A Short View of our present Trade and
Taxes compared -with what these Taxes may amount to after the Union. With
some Reasons why (if we enter in an Union?) our Trade should be under our
own Regulations. 1706, pp. 5, 6. The work is sometimes ascribed to Daniel
De Foe.

1 Cf. the following passage : " Excises first got a footing amongst us in the
Civil Wars, which was a time of universal Confusion ; and they were then so
odious that each party branded the other with being the Authors thereof; but
before that, they were so much dreaded, that a Member of Parliament was very
near being sent to the Tower for only mentioning their name in the House, tho'
with no evil design : What then would they have done to the Man, who should
have proposed multiplying them, when the Nation groaned under the Burthen of
so many, as we do already." A Word to the Freeholders and Burgesses of Great
Britain, being Seasonable and serious Remarks upon the inconsistent Conduct of
certain Boroughs, in sending Instructions to their Representatives to oppose the
Excise Bill, and yet re-electing them after their being rewarded with Places for
voting for the same. London, 1733, p. 31.

2 An Essay on the State of England in relation to its Trade, its Poor and its
Taxes, for carrying on the present War against France. By John Gary, Mer-
chant in Bristoll. Bristoll, 1695, p. 173.

X

Those who discuss the General Excise 27

payments will after all be insignificant. 1 The vital objection
to the excise, however, is its inequality ; for although the rich
man consumes more than the poor man, the tax is paid in the
one case out of the surplus over and above all needful expendi-
ture, but in the other case out of a fund which barely suffices
for the necessaries of life. 2

This view, which closely approaches the one held by mod-
ern democracies, was occasionally emphasized in the following
decades. One vigorous writer, early in the eighteenth cen-
tury, objects to " those cruel and unequal Taxes, which pinch
and afflict those People chiefly who are least able to support
Taxes." 3 He advances what he calls a "true, tho' perhaps
not a regularly determin'd Observation " ; namely, " when
Land is Tax'd, the Rich pay more than the Poor ; but when
the Product of Land is tax'd, the Poor pay more than the
Rich." He proceeds to show that "the Rich pay for their
Land because they have it; the Poor pay for their daily
Necessaries, because they have them not." * Owing to his
belief that taxes on commodities are relatively more burden-
some to the poor, he favors the land tax, 5 together with a tax
on funds. 6

1 " He that gets his Money by the Sweat of his Brow parts not from it with-
out much Remorse and Discontent, and when all is done, 'tis but a little they pay,
therefore Taxes that light heavy on them (such as Chimney-Money, and often-
times a Poll) tend rather to unhinge than assist the Government, by disgusting
such a number of robust and hardy men as carry a great personal Ballance in the
Kingdom." Ibid., p. 174.

2 " A general Excise cannot do well, for besides the great Charge and Oppres-
sion of Officers, it shews no Respect to the Poor, but they pay more than the
Wealthiest of their Neighbours suitable to what they have ; for though a rich Man
spends more in excisable things than a poor Man doth, yet it is not his All, whereas
the other's Poverty gives him leave to lay up nothing, but 'tis as much as he can do
to provide Necessaries for his Family, out of all which he pays his Proportion."
Ibid., p. 174.

8 Fair Payment no Spunge : or, Some Considerations on the Unreasonableness
of Refusing to Receive back Money lent on Publick Securities. And the Necessity
of Setting the Nation Free from the Insupportable Burthen of Debt and Taxes.
London, 1717. Chap, ix, "Of Equality of Taxes," p. 60.

4 Ibid., p. 61.

5 Ibid., p. 67.

6 Ibid., chap, x, "Of Inequalities in Taxings," p, 71, See below, p. 69.

28 Shifting and Incidence of Taxation

This view as to the incidence of the excise was, however,
in some danger of being neglected, when, toward the middle
of the eighteenth century, it was again put forward by two
writers with such force that it left its indelible imprint on
general thought. One of these authors goes so far as to
break entirely with the old theory of the basis of taxation,
and to lay down the principle that taxes should be levied
according to property and not according to consumption.
The excise, says he, sins against this cardinal rule, and is
therefore convicted of inequality. 1 But even regarded as a
tax on property that is, on commodities the excise is
thoroughly unequal ; for not only the tax, but a great deal
over and above the tax, will be shifted to the consumer, and
will hit the poor man on his necessaries. 2 Our author is,
however, so far carried away by his ardor to show the evils
of the excise as to intimate that wages must rise with the
increased price of necessaries, and that therefore the whole
community will suffer in the end. 3 Were it not that he puts
his emphasis on the first point the burden on the poor, -
rather than on the second the burden on the general com-
munity he ought rather to be included with writers like
Mun and Fauquier. 4

1 " Excises, as they are of all Impositions the most injurious to Liberty, so they
are the most unequal in their Nature, and fall the most heavily on Property. . . .
They are the most unequal, because Taxes should be measured by Property. . . .
But Excises measure by the Quantity of a Commodity consum'd : Whence the
Contribution of a poor Man with a large Family, may exceed Those of a rich
Batchelor of a hundred Times his Fortune." An Appeal to the Public, in rela-
tion to the Tobacco * * * and a Revival of the old Project, to establish a General
Excise. London, 1751, p. 51.

2 " They fall most heavily on Property, more especially when impos'd on
Necessaries, or on Commodities render'd by Habit necessary, because they accum-
ulate as they go; because he that issues the Tax first, will be paid for the dis-
bursement and also for the extraordinary Difficulties, Hardships, and Visitations
brought upon him by them." Ibid., p. 52.

3 " Because the Price of Labour rises with the Price of the Commodities con-
sum'd by the Labourer : and because the Dearness of Labour affects the whole
Circle of our Commerce, both Domestic and Foreign. . . . This is sufficient to
shew, that tho' the Trader is the first Person pinch'd on these Occasions, the Evil
is progressive, and at last both fastens and preys on the whole Community."
Ibid., pp. 52, 53. * See above, pp. 14 to 18.

Those who discuss the General Excise 29

The charge of inconsistency can, however, not be brought
against Sir John Nickolls, the other writer to show the in-
equality of general taxes on consumption. Nickolls firmly
held to the opinion that when taxes reached the consumers
they stayed there. 1 Taxes on consumption, in his opinion,
are thoroughly unjust, because they are out of all proportion
to the relative abilities of the taxpayers; for abilities are
measured by property and not by consumption. 2

The opposition to the excise was also strengthened by
those who not only pointed out that high taxes would cause
serious damage to the consumer by compelling him to dimin-
ish his consumption, but also showed that this would involve
a serious loss of revenue to the government. The point that
was subsequently so well put by Dean Swift, that in the
arithmetic of the customs two and two do not always make
four, was already emphasized during the excise controversy,
and was declared equally applicable to internal duties. 3

1 Remarks on the Advantages and Disadvantages of France and of Great-
Britain with Respect to Commerce, and to the other Means of Increasing the

IVealtk and Power of a State. Being a {pretended} Translation from the Eng-
lish, written by Sir John Nickolls and printed at Leyden 1754. Translated out
of the French Original. London, 1754.

2 "That these taxes incurr the objection of being unequal, and unjust, in that,
for the portion of things absolutely necessary to life, the poor and the rich pay the
same sum : insomuch that whereas the people being supposed divided into two
parts pretty near equal, of which the one has only its industry to live upon, the
other possesses riches, enjoys, and pays the labor of the other : these two halves,
so different in their abilities, share nevertheless equally the weight of these taxes
upon all the commodities, or rather necessaries, of which the consumption admits
of little or no abuse or luxury. The contribution is light, for the batchelors or
single persons, in easy and idle circumstances : but is excessive for those usefull
subjects, of whom the families are numerous, and the fortunes narrow." Ibid.,
p. 260. For his practical propositions, see below, p. 58.

3 "This is a Truth which will, I believe, be acknowledged by all Traders in
general, it being universally known that the greater Duty any Commodity pays, the
less of it ten-fold is consumed; consequently if the King has two Pence in the
Pound for any Merchandize, that before paid but one Penny, not above a tenth
Part of that Merchandize will be consumed, and consequently not above a tenth
Part imported; so that upon the Ballance the Crown will be a Loser eight Parts
in ten. " The Norfolk Scheme : or a Letter to William Pulteney, Esq. ; on the
Present Posture of Affairs, particularly with Relation to the Scheme for altering

30 Shifting and Incidence of Taxation

The chief controversy as to the advisability of the excise
turned, however, on the question of its influence on the
laborer, and more especially of its effect on the cost of labor.
Mun and his followers, it will be remembered, maintained
that, so far as taxes on consumption were taxes on the neces-
saries of life of the laborers, they would be shifted to the
employers. Petty and his school, on the other hand, held
that the excise on necessaries of life would rest on the work-
man. But while these latter writers agreed on the theory
of incidence, they drew different conclusions according to
their belief in the efficacy of high or of low wages. Most of
the writers of the close of the seventeenth and the first half
of the eighteenth century imagined that taxes on the neces-
saries of life would constitute a great stimulus toward an im-
provement in the condition of the laborer, in sobriety, care-
fulness and efficiency. A tax on labor would thus, they
thought, be a real spur to industry and commerce, and a
benefit to the community in general; for low wages mean
low cost of production. When the necessaries of life are
taxed, runs the argument, not only will the laborer have to
work harder and longer to maintain himself, which will be
a benefit to him but, on the other hand, there will be a re-
duction in the labor-cost to the employer, which will be an
advantage to the community. It was only very slowly that
this belief in the efficacy of low wages was replaced by what
we are to-day accustomed to call the theory of the economy
of high wages. With it came a corresponding distrust of the
policy of taxes on the necessaries of life. But both the advo-
cates and the opponents of the excise from this point of view
based their practical conclusions on the same theory of inci-
dence; namely, that a tax on necessaries would rest on the
laborer. 1

the Method of Collecting the Revenues, by converting the Customs into Excises, etc.
London, 1733, p. 27.

1 A mention of a few of the writers discussed in the following pages may be
found in Schulze-Gavernitz, Der Grossbetrieb, 1892, pp. 2-10, recently translated
by O. S. Hall, under the title of The Cotton Trade in England and on the
Continent. London, 1895. ^ ut ^ e does not treat them at all from the fiscal

Those who discuss the General Excise 31

The earliest trace of the doctrine that high wages are bad
not only for the laborer but also for the community is found
in a work of Thomas Manley. He points out that high wages
are the principal cause of England's inability to compete with
Holland in the production of manufactures. At the same
time, he contends, high wages do the laborer no good, because
not only do "the men have just as much the more to spend
in tipple, and remain now poorer than when their wages was
less," but " they work so much the fewer days by how much
the more they exact in their wages." x Another writer shortly
after expresses very much the same view as to the " mischiev-
ousness " of high wages, 2 and suggests that an endeavor be
made " to reduce the wages of our Manufacturers to a more
sober and less expensive way of living."

Neither Manley nor his anonymous follower proposed the
specific expedient of a tax on wages. Manley contented him-
self with stating in general terms that the chief concern of
England was to "subdue our wages"; 3 and the anonymous
writer recommended a rather drastic but indirect method to
reduce wages. 4 But the theory, when once put forth, could

point of view. Cf. also the few words in Brentano, Das Verhaltniss von Arbeits-
lohn und Arbeitszeit zur Arbeitsleistung, 1875; 2 & e d., 1893, P 57-

1 Usury at Six per Cent, examined, and Found unjustly charged by Sir Tho.
Culpeper and J. C. with many Crimes and Oppressions, "whereof 'tis altogether
innocent. Wherein is shewed the necessity of retrenching our Luxury and -vain
consumption of Forraign Commodities, imported by English Money : also the reduc-
ing the Wages of Servants, Labourers, and Workmen of all sorts, which raiseth
the value of our Manufactures, 15 or 20 per Cent, dearer than our Neighbours do
afford them, by reason of their cheap Wages, etc. By Thomas Manley, Gent. Lon-
don, 1669, p. 19.

2 " Handicraft Tradesmens high wages, which they exact for their work, is
greatly mischievous, not only to every man who hath occasion to use them . . .
but it is destructive to Trade, and hinders the consumption of our Manufactures by
Foreigners." The Grand Concern of England explained; in several Proposals
offered to the Consideration of the Parliament. By a Lover of his Countrey and
Well-wisher to the Prosperity both of the King and Kingdoms. London, 1673, p. 54.

8 Usury at Six per Cent., p. 22.

4 His plan is " to enjoyn all English men not to wear anything but what is of
our own Growth and Manufacturies; which will encrease a Consumption at home,
and set those at work who now live idle, and by giving them full work, would
bring down their wages." The Grand Concern, p. 55.

32 Shifting and Incidence of Taxation

not fail to draw attention to its obvious corollary. The de-
mand for the use of the power of taxation as an instrumen-
tality of social reform and the regulation of labor soon made
its appearance for the first time, perhaps in the work of
John Houghton. 1

In the heading of the chapter devoted to this subject,
Houghton lays down the principle " that this Kingdom will
thrive more, and the Manufactors live better, and sell their
Manufactures Cheaper when Provisions are Dear, than
when Cheap." 2 His major premise is that " if there be of
Food a Plenty, Laziness follows it." 3 When the workmen
get high wages, they stop work and spend their earnings in
debauchery. The ordinary laborer in England earns enough
in three or four days' labor to support him the entire week. 4
If he had to pay more for his provisions, he would work
harder and produce more. 5 Thus dearness would, in the
end, bring about industry and plenty. Houghton therefore
proposes, in order to maintain this artificial dearness, not
only an export bounty on corn, but an increase of the excise
on beer, ale and spirits, as well as the imposition of an
" Excise of a groat a pound on Wool." 6 The effect of this
will be, he thinks, that the " meaner sort of People will not

1 A Collection of Letters for the Improvement of Husbandry and Trade. By
John Houghton, Fellow of the Royal Society. London, 1681. The passages
quoted are found in the second volume, London, 1683.

2 Ibid., p. 174.
* Ibid., p. 175.

4 " When the Frame-work Knitters, or Makers of Silk-Stockings had a great
Price for their Work, they have been observed seldom to work on Mundays and
Tuesdays, but to spend most of that time at the Ale-House and Nine-Pins. . . .
The Weavers, 'tis common with them to be drunk on Munday, to have their
Heads ach on Tuesday, and their Tools out of order on Wednesday. As for the
Shoemakers, they'l rather be hang'd than not remember St. Crispin on Munday ;
and it commonly holds as long as they have a penny of Money or pennyworth of
Credit." Ibid. p. 177. His account of "most other Professions that live by
Labour " is equally delectable.

5 " If by the Dearness aforesaid the Manufactors cannot keep up their habitual
Port by working three days in a Week, they will work four days, or find out
Engines or new Contrivances equivalent." Ibid., p. 181.

6 Ibid., p. 183.

Those who discuss the General Excise 33

be diverted from better Imployments " ; but that " this part
of their Provision will be dearer to them, and will oblige them
to more Industry, whereby they will procure more Manufac-
ture to sell cheaper." 1

Petty himself, whose general theory on the incidence of taxa-
tion has already been explained, 2 in a subsequent treatise ex-
pressed views in substantial agreement with those of Hough-
ton. He significantly heads the chapter in question "That
some kind of Taxes and Publick Levies may rather increase
than diminish the Wealth of the Kingdom." 3 He maintains
that when the price of food is low, laborers can scarcely be
procured at all, 4 and he accordingly recommends as extremely
desirable a tax on the necessaries of life. 5

The belief that an increased cost of living would be an
incentive to industry is found in many of the writers of this
period. Not all, however, desire to secure this artificial dear-
ness through the medium of taxation. Thus, Sir William
Temple thought that the troubles of Ireland could easily be
remedied by " an Increase of People in the Country to such
a degree as may make things necessary to Life dear, and
thereby force general industry from each Member of a
Family (Women as well as Men)." 6 In the same way another
writer, soon after, sought to prove that " Labour is always
dearest when Provisions are cheapest," 7 and that an increase

1 A Collection of Letters for the Improvement of Husbandry and Trade,
p. 184.

2 Above, p. 1 8.

8 Political Arithmetick. By Sir William Petty. London, 1690, chap. ii.

4 " It is observed by Clothiers and others, who employ great numbers of poor
people, that when Corn is extremely plentiful, that the Labour of the poor is pro-
portionably dear : And scarce to be had at all (so licentious are they who labour
only to eat, or rather to drink)." Ibid., p. 45.

5 Petty joins to this the further recommendation that in times of plenty the
surplus food be sent to "publick Store-houses."

6 An Essay upon the Advancement of Trade in Ireland. By Sir William
Temple. Published in his Miscellanea, ed. 1693, part i, p. 116.

7 Some Thoughts on the Interest of Money in General, and particularly in the
Publick Funds. With Reasons for fixing the same at a lower Rate, with Regard
especially to the Landholders. London, n.d. (published between 1728 and 1740).
His argument is that " People in low Life, who work only for their daily Bread, if

D

34 Shifting and Incidence of Taxation

in the price of necessaries will not injure the laborer, or in-
crease the cost to the producer.

The general doctrine that taxes really conduce to thrift
was, however, made more or less popular in England toward
the end of the seventeenth century, by appeals to the experi-
ence of England's great rival, the Low Countries. Not
only did authors, like Temple, 1 continually call attention to
the Dutch, but ample testimony to the great benefits supposed
to result from the excise was found in the works of the Dutch
writers themselves, whose ideas were made accessible to the
English public through translation. Thus, the author of the
celebrated Political Maxims, who was always, but erroneously, 2
supposed in England to have been the renowned Dutch
statesman, John De Witt, advocates the imposition of excises
on the laborers, because "it is evident that all the said ways
for raising of Mony will excite the Commonalty to Ingenuity,
Diligence and Frugality." 3

This doctrine of the value of low wages continued far into
the eighteenth century. One of its prominent advocates
toward the middle of the century was the celebrated Josiah

they can get it by three Days Work in a Week, will many of them make Holiday
the other three, or set their own Price on their Labour," p. 73.

1 The following passage from Temple was much talked about : " The chief
Fonds out of which this (Revenue) rises is the Excise and the Customs : The first
is great and so general, that I have heard it observ'd at Amsterdam, that when in
a Tavern, a certain Dish of Fish is eaten with the usual Sauce, above thirty several
Excises are paid, for what is necessary to that small service." Observations upon
the United Provinces of the Netherlands, chap, vii ; reprinted in The Works of Sir
William Temple, Bart. London, 1720, i, pp. 70, 71.

2 The True Interest and Political Maxims of the Republick of Holland and
West Friesland. Written by John De Witt and other great Men in Holland.
London, 1702. The original Dutch edition was published anonymously in 1662.
The real author was Pieter De la Court. De Witt did indeed write one or two
chapters, but not the ones in question. We now know precisely what he did
write. Cf. Laspeyres, Geschichte der "volkswirthschaftlichen Anschauungen der
Niederlander und ihrer Liter atur zur Zeit der Republik. 1863, pp. 1 8, 19.

8 The True Interest, p. 109. In An Essay on Trade and Commerce, men-
tioned below, p. 37, note 2, the maxim is quoted on p. 49 in a little different lan-
guage, and ascribed to De Witt. The erroneous ascription is also followed in
Arthur Young, The Farmer's Letters, p. 29, and in Schulze-Gavernitz, Der Gross-
betrieb, p. 3.

Those who discuss the General Excise 35

Tucker. Tucker turns his attention to " the lower Class of
People " and holds that if they " are subject to little or no Con-
troll, they will run into Vice : Vice is attended with Expence,
which must be supported either by an high Price for their
Labour, or by Methods still more destructive." 1 In England
" the men are as bad as can be described : who become more
vitious, more indigent and idle, in proportion to the advance
of Wages and the Cheapness of Provisions." 2 Tucker then
proceeds to discuss the plan of a "certain very ingenious
Gentleman, and himself a great Manufacturer in the Cloth-
ing Way " to impose a special tax on the necessaries of life.
This gentleman had observed " that in exceeding dear Years
when Corn and Provisions are at an extravagant Price, then
the Work is best and cheapest done : but that in cheap
Years, the Manufacturers are idle, Wages high, and Work ill
done." " Therefore," adds Tucker, " he infers, that the high
Duties, Taxes and Excises upon the Necessaries of Life are
so far from being a Disadvantage to Trade . . . that they
are eventually the chief Support of it: and ought to be
higher still, in order to oblige the Poor either to Work or
Starve." 3

Tucker observes that " Some Things may certainly be said
in favour of this Scheme." But on mature reflection he is,
as "an humane and compassionate man," a little doubtful
about it, 4 and thinks that his alternative plans of encourag-
ing immigration 5 and of raising the pecuniary limit of the
elective franchise 6 may produce the same results and " keep

1 A Brief Essay on the Advantages and Disadvantages which respectively
attend France and Great Britain, with Regard to Trade, etc. By Josiah Tucker.
2d ed., London, 1750, p. 36. The third edition of 1753 is reprinted in Lord
Overstone's Select Collection of Scarce and Valuable Tracts on Commerce, 1859.

2 Ibid., p. 37.

3 Ibid., p. 54.

4 He even speaks of it as "a very singular scheme."

6 The advantage of his "Naturalization" scheme is supposed to be "that by
this means, the Price of Labour is continually beat down, Combinations of Jour-
neymen against their Masters are prevented, Industry is encouraged and an Emu-
lation excited." Ibid., p. 42. Cf. p. 91.

6 As a consequence of raising the elective franchise to ,200 for tradesmen,

36 Shifting and Incidence of Taxation

down the Price of Labour and prevent any Combination."
As a result of this "perhaps the morals of our Poor would
be as unexceptionable and the Price of Labour as cheap as in
any other trading country." Later, indeed, Tucker changed
his opinions still further ; for he not only became an advocate
of a direct tax on luxuries, 1 but finally abandoned his whole
contention as to the efficacy of low wages. 2

The doctrine that wages do not rise with the price of pro-
visions was also developed by several writers who objected
to the restrictions on the exportation of wheat. They did
not deny that prices would rise, but contended that high
prices of food would mean more work rather than higher
wages. Arthur Young, for example, not only states that " in
no instance will you find that labour is high, because pro-
visions are the same," 3 but he adds that " living must be
rendered dear before that general industry, which can alone
support a manufacturing people, will be rooted amongst
them." * " High taxes," he continues, " must have operated
to render high rates of labour necessary ... in those coun-
tries where manufactures make the greatest shoots."

The most complete development of the doctrine that ex-
cises are a benefit to the laborers is found in the anonymous

" the privilege of voting would become a laudable Inducement to every Artificer
(not to get Drunk, or take a paltry Bribe, as at present is the case) but to be fru-
gal and saving. . . . The Number also of the Poor would consequently be les-
sened: the Price of Labour reduced." A Brief Essay, pp. 52, 53.

1 See below, p. 58.

2 See below, p. 45.

8 The Expediency of a Free Exportation of Corn at this Time : with Some
Observations on the Bounty. By the author of the Farmers Letters to the People
cf England, London, 2d ed., 1770, p. 21.

4 Ibid., p. 28. The same ideas are expressed by Young in other works. So in
The Farmer's Letters to the People of England, London, 1767, pp. 27-32, where
he quotes approvingly the tract mentioned in the next note. So also in his
Political Arithmetic, containing Observations on the Present State of Great Britain
and the Principles of her Policy in the Encouragement of Agriculture, London,
1774, where he quotes Houghton's maxim that it is a good thing "to encourage
the people to a high living." Young comments on this by saying: "The idea
of encouraging the people to live high, is a very bold, but I believe a just one."
Ibid., pp. no, in.

Those who discuss the General Excise 37

work of Temple, who wrote shortly before Adam Smith. A
riot of the workingmen in London, due to a combination
of high prices of food and a lack of work, took place in
1765. This led our author to publish a tract, in which he
attempted to prove that high prices were beneficial to the
laborers in that it stimulated their industry. 1 Five years
later this tract was rewritten and published as a portly vol-
ume. In it he advances "the paradox that taxes tend to
lower the price of labour," and states as a familiar truth that
" when provisions are cheap, labour is always relatively dear."
The three self-evident principles on which the whole work
rests are summarized as follows : " First, that mankind, in
general, are naturally inclined to ease and indolence, and
that nothing but absolute necessity will enforce labour and
industry. Secondly, that our poor, in general, work only for
the bare necessities of life, or for the means of a low debauch ;
which, when obtained, they cease to labour till roused again
by necessity. Thirdly, that it is best for themselves, as well
as for society, that they should be constantly employed." 2

Temple argues that as laborers are far more anxious to
work when provisions are very dear, the augmented supply
of labor at such times brings down the rate of wages. " A
general industry is immediately created; workmen croud
about the houses of master-manufacturers, begging for
work, almost at any rate ; and they work five or six days

1 The title of this tract clearly explains its purpose : Considerations on Taxes,
as they are supposed to affect the Price of Labour in our Manufactures : also, some
Reflections on the General Behaviour and Disposition of the Manufacturing Popu-
lace of this Kingdom ; showing, by Arguments drawn from Experience, that
nothing but Necessity will enforce Labour ; and that no State ever did, or ever
can make any considerable Figure in Trade, where the Necessaries of Life are at
a low Price. London, 1765, esp. pp. 29-31. Cunningham, Growth of English
Industry and Commerce in Modern Times, p. 560, ascribes it to Temple. This
William Temple was originally a clothier of Trowbridge, and must not be con-
founded with Sir William Temple, who entertained much the same views, but
who wrote in the preceding century. See above, p. 33.

2 An Essay on Trade and Commerce : Containing Observations on Taxes, as
they are supposed to affect the Price of Labour in our Manufactories : together with
.some interesting Reflections on the Importance of our Trade to America. By the
author of Considerations on Taxes. London, 1770.

38 Shifting and Incidence of Taxation

in the week instead of three or four. Labour being a kind of
commodity, the quantity then offered tends to the lowering
its price; and would do so, unless art or violence inter-
vened. Thus far the paradox is explained by experience;
and thus far it is proved, that dearness of provisions tends
to lower the price of labour in manufactories." 1 Temple
then proceeds to prove the other side of the same proposi-
tion, that low prices of food lead to high wages and dear
work. The experience of Holland, as usual, furnishes him
with his strongest illustrations. He does not, indeed, go so
far as to recommend any further increase of taxes on the
laborer. 2 But he is at considerable pains to point out that
the taxes thus far levied on the necessaries of life, whether
in the shape of excises or of impost duties, have exerted
none but a good influence on the laborers in particular and
on the community in general. 3

While the fullest exposition of this doctrine is found in the
book just mentioned, the strongest and most aphoristic ex-
pression of the idea is contained in another work of William
Temple, 4 with an extract from which our series of quotations
may fitly close. Temple contends that "the only way to make
the poor temperate and industrious, is to lay them under a
necessity of labouring all the time they can spare from meals
and sleep, in order to procure the common necessaries of
life." 5 And after adverting to the experience of Holland, 6

1 An Essay on Trade and Commerce, p. 16.

2 Ibid., pp. 282-286.

8 " Of what infinite consequence then is it," he exclaims in another place,
" that some method should be found out to enforce labour, and to procure habits
of sobriety and industry among the manufacturing populace." Ibid., p. 31.
Cf. also pp. 22 etseq. of the original tract of 1765.

* A Vindication of Commerce and the Arts, proving that they are the Source
of the Greatness, Power, Riches and Populousness of a State. By I. B., M.D.
[William Temple]. London, 1758. The tract has been reprinted in Lord Over-
stone's Select Collection of Scarce and Valuable Tracts on Commerce. London,
1859.

6 Overstone's Select Collection, p. 534.

6 " Wages in Holland are low in proportion to the price of necessaries, every-
thing being excessively taxed ; the people from hence are exceedingly industri-
ous." Ibid., p. 532.

Those who discuss the General Excise 39

he concludes that the best way is " to raise a fund by a tax
on necessaries in a time of plenty." J

In the face of the virtual unanimity of opinion of this
considerable number of authors, it would seem difficult for
the contrary view to make any converts. Nevertheless,
although it was not at first a popular doctrine among economic
writers, the theory that low wages are not necessarily a
benefit to a country, and that taxes are not needed to reduce
the cost of labor, gradually made headway in scientific and
commercial circles.

Perhaps the earliest writer to deny the theory that low
wages are good for a country was Josiah Child. In a con-
troversy with Manley he takes exception to the statement
that " it is the Dearness of Wages that spoils the English
Trade." Child lays down the principle that "wherever
Wages are high universally thro'out the whole World it is
an infallible evidence of the Riches of that Country : and
wherever Wages for Labour runs low, it is a proof of the
Poverty of that Place." 2 The attempt to lower wages, he
continues, can have only injurious results, and leads to an
emigration of the people to countries where higher wages
are paid. 3 " It is true," says Child, " our Great Grandfath-
ers did exercise such a Policy of endeavoring to retrench the
price of Labour by a Law (although they never could affect
it) ; we are since, with the rest of the Trading World, grown
Wiser in this matter, and I hope shall so continue." 4 At the
same time, Child does not seem to have abandoned the old
theory that high prices of food are good for the workman.
In another passage he discusses the influence of dear food

1 Overstone's Select Collection, p. 516.

2 A Discourse about Trade, wherein the Reduction of Interest of Money to 4!.
per Centum is Recommended, etc., etc. Never before printed. [By Josiah
Child.] London, 1690, Preface, pp. u, 12. The second edition, published in
1694, like all subsequent editions, is entitled A New Discourse of Trade. For
Manley 's views, see above, p. 31.

8 " If we retrench by Law the Labor of the People, we drive them from us to
other Countries which give better Rates." Ibid.
* Ibid., p. 13.

40 Shifting and Incidence of Taxation

on industry very much in the style of the older writers. 1 He
even goes so far as to speak about excises as conducing to
thrift. 2 So that Child can scarcely be considered an oppo-
nent of the older theory so far as concerns its application
to finance.

The clearest of the early writers to prove the economy of
high wages was John Gary, whose views on another point
have already been mentioned. 3 Gary puts the problem as
follows : " Whether the Price of Labour discourages our
Manufactures or hinders Improvements in our Product ? "
He solves the problem by stating "that both our Product
and Manufactures may be carried on to advantage without
running down the labour of the Poor." He then proceeds
to state his argument under two heads. First, as regards
the productions of the soil, says Gary, it should be remem-
bered that nominal wages must vary with the price of food. 4
Therefore a reduction of wages implies a lowering of prices ;

1 " The Poor live better in the dearest Countries for Provisions, than in the
cheapest, and better in a dear year than in a cheap, (especially in relation to the
Publique Good), for that in a cheap year they will not work two days in a week;
their humour being such, that they will not provide for a hard time ; but just
work so much and no more, as may maintain them in that mean condition to
which they have been accustomed." This passage was first printed in Child's
earlier work : Brief Observations concerning Trade and Interest of Money. By
J. C. London, 1668, p. II. It is reproduced in the Discourse about Trade, on
p. 19 of the portion entitled "A Discourse concerning Trade." It also appears
in the later editions.

2 "The Abatement of Interest conjoynt with Excises upon our home consump-
tion are two of the most comprehensive and effectual Sumptuary Laws that ever
were established, and most necessitating and engaging any People to thriftiness,
the high Road to Riches." A Discourse about Trade, p. 27 of the part entitled
" Trade and Interest of Money considered." It was probably these passages that
caused Arthur Young in his Farmer's Letters, p. 29, to mention Child as having
" concurred in the same observations" that he made. See above, p. 36.

3 See above, p. 26.

4 " As for the first, our Product, I am of opinion that the running down the
Labour of the Poor is no advantage to it, nor is it to the Interest of England to do
it, nor can the People of England live on such low Wages as they do in other
Countrys; for we must consider that Wages must bear a Rate in all Nations
according to the prices of Provisions." An Essay on the State of England, etc.
By John Cary. Bristol, 1695, p. J 44-

Those who discuss the General Excise 41

and lower prices involve a diminution in the value of land.
" You cannot fall Wages unless you fall Product, and if you
fall Product, you must necessarily fall Land." * Secondly,
as regards manufactured articles, he continues, people have
only to look at them, to see that prices have been continually
falling without any corresponding decrease in wages. 2 " But
then the question will be, how this is done ? I answer, It
proceeds from the Ingenuity of the Manufacturer, and the
Improvements he makes in his ways of working." He then
proceeds to show how machinery effects this result, 3 and con-
cludes that " New Projections are every day set on foot to
render the making of our Manufactures easie, which are
made Cheap by the Heads of the Manufacturers, not by fall-
ing the Price of poor Peoples Labour." 4

Although this most suggestive passage shows how old are
some of the most modern views on industry, for some time
comparatively little application of them was made to prob-
lems of taxation. We do, indeed, find in the ensuing decades
some incidental allusions to the impolicy of taxing wages.
Thus, one interesting writer states that "the labour of the
meaner sort of people is of too great consequence to a trad-
ing Nation to be any way slighted or disregarded." 5 A

1 An Essay on the State of England, p. 145.

2 " Observation, or Experience of what hath been done, we have and daily do
see that it is so; the Refiners of Sugar lately sold for Six Pence per Pound what
yielded twenty Years since Twelve Pence; the Distillers sell their Spirits for one
third part of what they formerly did; Glass Bottles, Silk-Stockings and other
Manufactures, (too many to be enumerated) are sold for half the Prices they were
a few Years since, without falling the Labour of the Poor." Ibid.

3 " All which save the Labour of many Hands, so the Wages of those imployed
need not be lessened." Ibid., p. 146.

* Ibid., p. 147.

5 This pamphleteer was opposed to the employment of foreigners. After
showing the advantages of employing home workmen, he proceeds : " and since
the very meanest under-workers in Wool contribute in some measure towards the
support of the State, and the movement of the great wheels of Trade; it seems a
peculiar hardship upon them, as well as inconsistency in the management of affairs
here, first to put them under a necessity of raising their Wages, by taxing many
of the necessaries of life; and afterwards to make the dearness of their labour,
occasion'd by those Taxes, the very ground and reason of discouraging, or declin-

42 Shifting and Incidence of Taxation

few years later, Nugent states emphatically : " one thing is
certain, that no good can be produced by taxes upon com-
modities. They may starve the industrious, but they never
will induce the idle and extravagant to labour and to save." l
In the second quarter of the eighteenth century, however, a
more vigorous attack was made on the premises as well as
vpn the conclusions of the partisans of the excise.

Among the most important of these writers was Vander-
lint. At first sight, he seems to maintain that prosperity
can be attained only through a reduction of wages. 2 Yet,
notwithstanding the fact that he demands an abolition of
taxes on necessaries for this reason, 3 Vanderlint is in reality
a strenuous advocate of higher remuneration for the workman.
The lowering of wages at which he aims is merely a seeming
reduction due to the abolition of taxes and to an increase in
the money supply. Prices, he thinks, will fall still more, 4 which
of course means a relative rise in wages. 5 Vanderlint is, in
fact, a strong believer in the theory that a high standard of
life for the laboring population is much to be desired. 6 He

ing to make use of English hands, and of employing foreign (as in this view we
must account Irish) hands in their stead." The Grasiers* Complaint and Peti-
tion for Redress : or the Necessity of Restraining Irish Wool and Yarn ; and of
Raising and Supporting the Price of Wool of the Growth of Great Britain con-
sider } d. By a Lincolnshire Grasier. London, 1726, pp. 44, 45.

1 Considerations upon a Reduction of the Land Tax. [By Robert Nugent.]
London, 1749, p. 17.

2 " Reducing the present Rates of Labour appears to me absolutely necessary
to increase . . . Trade." Preface to Money answers all Things : or, an Essay
to make Money sufficiently Plentiful amongst all Ranks of People, and Increase
our Foreign and Domestick Trade, Fill the Empty Houses -with Inhabitants, En-
courage the Marriage State, Lessen the Number of Hawkers and Pedlars, and in
a great measure, prevent giving long Credit, and making bad Debts in Trade.
By Jacob Vanderlint. London, 1 734.

8 " I do verily believe that taking the Taxes intirely off the Things the work-
ing People consume is so absolutely needful, that Labour can hardly be reduced
without it." Ibid., p. 159.

* This is shown, among other things, by the title of the work. It was this
grievous error about money which served to consign the book to oblivion, not-
withstanding its many good points. 6 Ibid., pp. 34, 69, and esp. 86, 87.

6 Among the reasons advanced is that higher wages will conduce to better
work : " The working People can and will do a great deal more Work than they

Those who discuss the General Excise 43

is even the first writer to advance a doctrine that has only
recently come into prominence the doctrine that as the
laborers form the mass of consumers, the large consumption
which gives the impetus to profitable production and general
prosperity itself depends on the purchasing power of the
consumers, that is, on the high wages and the high
standard of life among the laborers. 1

Twenty years later, Sir John Nickolls went to the root of
the matter when he stated, 2 "We have flattered ourselves
too much, if we have believed that on augmenting the taxes
upon the consumption, we should bring our workmen to the
sobriety, or frugality of a Frenchman, who lives, or rather
starves, upon roots, chestnuts, bread and water; or to the
thriftiness of a Dutchman, who contents himself with dried
fish, and butter-milk. When our workmen can no longer
raise the price of their work to their mind, there 'still remain
two great refuges to them from labor, the Parish and
Robbing." 3

The most popular exponent of the newer doctrine was
Postlethwayt. In a passage which is practically a plagiarism
of the one just quoted from Nickolls, Postlethwayt objects to
taxes on the mass of consumers. 4 It is true, indeed, he says,

do, if they were sufficiently encouraged. For I take it for a Maxim, that the
People of no Class will ever want Industry, if they don't want Encouragement."
Ibid., pp. 122, 123.

1 He objects to any scheme for " making the Poor fare harder, or consume less
than their reasonable Wants in that Station require; for they, being the Bulk of
Mankind, would in this* Case affect the Consumption of Things in general so
mightily, that there would be a Want of Trade and Business amongst the other
Part of the People." Ibid., p. 69, note. (In reality this should be page 6l, as
the headings of pp. 65-72 are printed twice by mistake.) Cf. p. 81.

2 Remarks on the Advantages and Disadvantages of France and of Great
Britain with Respect to Commerce. 1754. See above, p. 29, note I.

8 Ibid., pp. 261, 162.

4 " Augmenting Taxes on our Consumption, has not "brought our Workmen to
the Sobriety or Frugality of a Frenchman or to the Thriftiness of a Dutchman :
and when our Workmen cannot raise the Price of their Labor and Workmanship
to the Degree they would, they have recourse to the Parish or Robbery."
Great Britain's True System. By Malachy Postlethwayt, Esq. London, 1757,
p. 1 60. For the full title, see below, p. 62.

44 Shifting and Incidence of Taxation

that wages are fixed by the price of food. l But the increase
of wages due to a tax will increase, not decrease, the cost of
production, and will put the country at a disadvantage in
competition with foreigners. The result will be the ruin of
the whole community, of course including the laboring class.
An artificial rise in wages through taxation, in his opinion,
gives " superaddition of value " to the country's products,
which can only be harmful to all concerned. 2 But, as he
points out in another work, high wages and leisure for the
workman, when created by natural causes, are the surest
guarantee of good work and bountiful production. 3 Massie,
another popular writer of the same period, expressed a
similar conclusion very forcibly in the title of a work de-
signed to prove that the excise would be a " pinchbelly tax "
to the workingmen. 4

The point could not have been put more plainly than by
Nathaniel Forster, who pours out the vial of his wrath upon
those persons who have " the hardiness to assert that high
taxes upon the necessaries of life contribute in their conse-
quences even to the more plentiful production of them and
that the poor will be industrious only in the degree that they
are necessitous." 5 Forster terms this "a doctrine which

1 " Where Food and Cloathing, the Necessaries for a Day, are purchased for a
little, there Wages will be low, or Labor Cheap." Great Britain's True Sys-
tem, p. 144.

2 " When the general Price of Labor soars above its natural Standard, and
thereby an artificial Value is superadded to our Produce and Manufacture, beyond
which our Rivals do, we must lose our Dominion in Trade ; and our Ruin then
cannot be far distant : and this Superaddition of Value to our Commodities arises
solely from the Modus wherein our Taxes are laid and raised." Ibid., p. 158.

3 The Universal Dictionary of Trade and Commerce. London, 1751, vol. i,
Preliminary Discourse.

4 Reasons humbly offered against laying any further tax upon Malt or Beer,
shelving that such a tax would not only cause great Losses to the Landholders of
England, but be prejudicial to several branches of our Manufactures, and prove
a pinchbelly Tax to some hundred thousand Families of Labouring People. By
J. Massie. London, 1760. For other views of Massie, see below, pp. 63, 64.

5 An Enquiry into the Causes of the Present High. Price of Provisions. In
Two Parts: I Of the General Causes of this Evil; II Of the Causes of it in
some particular Instances. [By Nathaniel Forster.] London, 1767, p. 49.

Those who discuss the General Excise 45

avarice in private life has greedily seized, and has not failed
to improve to its own purposes." " But it is a doctrine," he
adds, " as false, as it is inhuman." a He proceeds to show
that it is necessarily false ; for, says he, if harder work means
lower wages, taxes will lead not to industry, but to the
reverse. 2

This marked the turning-point in the controversy. Some
authors, like Tucker, were now convinced that their previous
views had been erroneous. Tucker, in fact, wrote a special
tract designed to prove that countries where high wages are
paid can successfully compete with those in which the rate of
wages is low. 3 Higher wages, says he, do not necessarily
imply greater cost of production, for the larger remuneration
of the laborer is compensated by his greater skill. " Is it
not much cheaper," asks Tucker, "to give 2s. 6d. a Day in
the rich Country to the nimble and adroit Artist, than it is to
give only 6d. in the poor one, to the tedious, aukward Bun-
gler." 4 In the same way Schomberg expresses the newer
theory in the statement that "labour in a country of low
wages is comparatively dearer, than where wages are high." 5

Thus we see that in the third quarter of the eighteenth
century the belief that taxes on labor would benefit the com-
munity by acting as a spur to industry was seriously shaken.
When this doubt was reinforced by the more general theory
already discussed, 6 that taxes on the poor are a hardship for

1 An Enquiry into the Causes of the Present High Price of Provisions, p. 55.

2 " If a man sees that the harder he labours, the higher he shall be taxed, or if
he finds in private life that his wages are lowered in proportion to his industry, is
it in nature that either of these circumstances should tend to increase his industry?
They must always have a contrary effect, and will necessarily crush and extinguish
it." _ Ibid., p. 58.

3 Four Tracts on Political and Commercial Subjects. By Josiah Tucker, D.D.
2d ed., 1774. Tract I: "Whether a rich Country can stand a Competition with
a poor Country (of equal natural Advantages) in raising of Provisions and Cheap-
ness of Manufactures."

4 Ibid., p. 34.

6 Historical and Political Remarks upon the Tariff of the Commercial Treaty :
With Preliminary Observations. [By A. C. Schomberg.] London, 1787, pp. 156
et seq.

6 See above, pp. 26-28.

46 Shifting and Incidence of Taxation

them, whatever be the result on the community at large, the
day of complete confidence in the excise had gone by. The
point to be emphasized is that the advocates, as well as
the opponents of the excise, 1 agreed as to their theory of in-
cidence; and that some defended, while others objected to,
this system of the taxation of necessaries precisely because, in
their opinion, it rested on the poor. Their general doctrine
of incidence, in short, was that the excise rests on the mass of
the consumers.

3. The Excise is shifted to the Landowners

As compared with the writers discussed in the previous
section, there were few who maintained that the incidence of
the excise as such is on the landowner. There were, indeed,
some influential thinkers who held that all taxes are shifted
to the land. 2 But the special doctrine which singled out ex-
cises as the particular taxes that finally rest on land met with
comparatively little support.

Probably the first writer to advance this theory was an
anonymous pamphleteer of the last decade of the seventeenth
century. He is concerned especially with " a Home-Excise
upon things eatable and drinkable, and several other Merchan-
dizes which are sold in the Market." 3 The ordinary state-
ment that an excise, which he calls " a troublesome and slavish
sort of Tax," 4 rests on the consumer is declared by him to
be an error. For example, the more the farmer has to pay
for the commodities of his own consumption, says he, the less
he will be able to pay as rent. 5 The farmers and the land-

1 With the exception of Vanderlint, whose attitude is explained below, p. 76.

2 See below, pp. 71 et seq.

8 Some Considerations about the most proper Way of Raising Money in the
Present Conjuncture. London, 1692, p. 15.

4 Ibid., p. 27.

5 " The common argument for an Excise, That it will spare our Lands ; is
grounded upon a false Supposition : This is not a sparing our Lands, but a charg-
ing them for ever with double what is needful. The dearer the Farmer pays for
his Commodities, the less Rent he will pay; and the less his Product yields him

Those who discuss the General Excise 47

owners, moreover, will be the only ones to suffer. For if a
tax be imposed on some of the farmer's own products, as for
instance on malt, he will have to bear the greater part or the
whole of the tax, because otherwise there would be a con-
siderable falling off in the demand and a consequent diminu-
tion of price. The brewers will be the real gainers, for they
will get their raw material cheap and will sell the finished
product at the old price. 1 The author, it thus appears, is not
very clear in explaining why a tax would cause the price of
manufactured articles to rise, but would have no such effect
on agricultural products.

Another writer of the same period makes the statement
that "A General Excise upon Home Commodities is a real
Land Tax, and will have the same Influence upon the Value
of Lands and Rents, as that we call a Land Tax, or Monthly
Assessment hath." 2 He is aware of the general principle
that prices fall with the increase of supply ; 3 but he thinks
that the supply of commodities in England is so great that
the market is at the mercy of the purchaser. 4 A tax on corn-
clear, accordingly he must value his Farm. The more (for example) is laid on Lead,
the less will Woods and Oar yield; and so of other Commodities." Ibid., p. 28.

1 " It is evident, this Tax will fall very hard everywhere upon the poor Farmers;
and those who are best able to pay it, will be most spared : For example, if an
Excise should be laid upon Malt, where will the Burden lye? The price of it
will certainly sink in the Countrey, for want of Consumption, by reason of the new
Imposition. The Brewers in great Cities and Towns . . . will be the only Gain-
ers, since they will buy their Malt cheap, and sell their drink as dear or dearer
than before. And the poor Farmer will bear the loss." Ibid., p. 29.

2 An Essay upon Taxes, calculated for the Present Juncture of Affairs in Eng-
land. London, 1693, P- Ia The CO P V * n the possession of the present writer is
ascribed by its former possessor, but probably without reason, to Sir William
Temple.

3 " If the Necessity of the Buyer be greater than the Seller, the Market will rise;
but if that of the Seller be greater than the Buyer, the Price of Commodities must
fall; and any Duty laid upon Commodities will lye upon either accordingly."
Ibid., pp. 12-12.

4 " But as to the present Case in England, I think that there is nothing more
apparent, than the Plenty of Home Commodities, and the want of People to con-
sume them . . . ; the consequence of which necessarily will be, That whatever
Duty is impos'd upon the Commodity, the Buyer will have it so much the
cheaper." It>id.,p. 12.

48 Shifting and Incidence of Taxation

modities, therefore, must fall on the producer or seller ; and,
since everything is a product of the land, a tax on products is
a tax on land. 1

At the time of the controversy over Walpole's excise
scheme, we find the same views in a number of pamphlets
designed to show the injurious consequences of the tax. Of
these, the ablest are by Pulteney 2 and D' Anvers. 3 Few of
these writers distinguish, in their discussions of the incidence
of the tax, between the landlord and the farmer who rents
the land. One writer, however, goes into the question a little
more fully. He maintains that just as a land tax levied
on the occupier or farmer is shifted to the owner of the
land, 4 so an excise tax, for instance on salt, even though
it reach the farmer, is ultimately paid by the landlord through
a fall in rent. 5 Even assuming, however, that the excise is
shifted to the poor consumer, he will not suffer in the long
run. For if the excise takes the place of the land tax, the
landlord will have more to spend " in Hospitality " as well as

1 " A general Excise and a Land Tax differ not essentially, since both are a Duty
upon the same Commodities, which are the Product of Land." An Essay upon
Taxes, etc., p. u. As the object of the author is to diminish the burden upon
land, he therefore favors a general property tax. See below, p. 68.

2 The Case of the Revival of the Salt Duty fully stated and considered with
some Remarks on the Present State of affairs, in answer to a late Pamphlet intitled
a Letter to a Freeholder on the Reduction of the Land Tax to one Shilling in the
Pound. In a Letter from a Member of the House to a Gentleman in the Country.
[By William Pulteney.] London, 1732. The author quotes Locke's statement
that all taxes fall on land, but adds : " I could cite a great deal more to the same
Purpose . . . ; but I chuse to decline it, lest I should be represented as an Advo-
cate for Land Taxes; whereas my great Desire is that our Taxes in general may
belessen'd." p. 49. Cf. his views as to the effect of taxes on necessaries and
wages, p. 54.

3 An Argument against Excises, in several Essays lately published in the
Craftsman, and now collected together. By Caleb D'Anvers of Gray's Inn, Esq.
London, 2d ed., 1733. See especially pp. 67 and 76.

4 " Tho these Charges are paid immediately by the occupier, yet they fall ulti-
mately on the Landlord; who is obliged on these accounts to let his Land so
much the cheaper." The Case of the Salt-Duty and Land- Tax offered to the
Consideration of every Freeholder. London, 1732, p. 10.

5 " It is a Tax that does not affect the Farmer, for he hires his Land the cheaper
of his Landlord." Ibid., p. II.

Those who discuss the General Excise 49

in the " Improvement of his Estates " ; and the laborer will
be the person to reap the benefit. 1 The honesty of our
author's statements, as well as his logic, is, however, open to
criticism ; for while the other writers object to the excises
because they affect the landed interest, he is strongly in
favor of the scheme, while at the same time he is strenuously
opposed to any increase in the land tax. 2

4. The Excise rests on the Traders

Our survey of the different views held as to the excise
would not be complete without mentioning those writers
who maintained that the tax was not shifted at all, but rested
on the merchant who paid it first. This doctrine was put
forward with especial emphasis at the time of Walpole's
excise scheme by its opponents, who were desirous of mar-
shalling every possible argument against the plan.

One of the most vehement pamphleteers, for instance,
objects to the "bondage merchants suffer," after exposing
themselves to the dangers of the sea, and after paying import
duties " by not being permitted to deliver their Goods after
Sale without paying an imposed Penalty by Way of Excise." 3

1 If the dealer pays the duty, he shifts it to the consumer. " Who then is the
Sufferer. If anybody, it is the Labourer : but it will be found that he has no reason
to complain." Ibid., p. 13.

2 The land tax he calls a "partial tax," for " every one knows that Personal
Estates are seldom or never charged : for Money is of a transitory Nature; it shifts
so often from Place to Place, and Person to Person, that 'tis impossible to know
where, or in whose hands to charge it." Ibid., p. 9. Furthermore, it is in his
opinion very unequal in different parts of the Kingdom. Cf. p. 16. He proposes
accordingly a freeing of the land, and thinks that "it might be done by laying
a Tax, either on one or two Species of Commodities in common use, or on some
favourite vanities of Mankind." Ibid., p. 1 7.

8 "As if," he adds, "the Trade of a Merchant should now be looked upon as
guilty of some high Crimination, and therefore fitting to be manacled and awed
with the Bonds of slavish Restraint; ... as if those Goods which the Merchant
hath purchased in foreign Parts, were not as properly his as the Gentlemens
Houses and Lands." Excise anatomized. Declaring that unequal Imposition of
Excise to be the only Cause of the Ruin of Trade, the universal Impoverishment,
and destructive to the Liberties of the whole Nation. By Z. G., A Well-wisher
of the common good. London, 1733, p. 5.
E

50 Shifting and Incidence of Taxation

The dealer, he contends, is thus made to suffer all manner of
delay and inconvenience, and often loses the chance of a
sale. He discusses, in picturesque language, nine objections
to the excise, 1 and finds that it errs most grievously " by the
disproportionableness and inequality of its Imposition, by
laying the greatest Weight and Burthen on the Back of
Trade, thereby utterly disheartening the most ingenious
and industrious Party." 2 He is not weary of speaking of
the tax as " that detestable and so often damned Imposition
of Excise." 3 The vehemence of the writer's language in
describing the nine inequalities of the excise is paralleled in
English literature only by the author (who signs himself
Thrasybulus) of a much later work which paints in lurid
colors the thirty-three defects of the excise. 4

1 He speaks of the excisemen as those " who like ravenous wolves (using the
Law of Excise for their Sheep's Cloathing) will not satisfy their insatiable Appe-
tites with less than the greater Part (of the merchants' property)." Excise
anatomized, p. 6. He speaks of other officials as " those deformed Monsters of
this Age, cloak'd with the Name of Farmers of the Excise, whose insolent Vile-
ness, and exhausting Oppressions, transcends all former Ages." Ibid., p. 9.

2 Ibid., p. 4. "The Merchant and Trader," he adds elsewhere, "stands in as
much Fear of the Excise-Man, as the Welsh Traveller did of his Host, when
being at Supper, and finding amongst his Eggs, one with a chick in it, hastily
supp'd it up, for fear, lest his Host seeing it, might make him pay a Groat for
it." Ibid., p. 9.

* Ibid., p. 19. As its consequence "all our former flourishing Tranquility is
become a Skeleton of Dry Bones." p. n.

4 Cf. Six Letters on Excise, and particularly on the Act passed in 1789, for
subjecting the Manufactures of and Dealers in Tobacco and Snuff to the Laws of
Excise. London, 1790. From the ninety-two pages of invective the following
may be quoted as samples, although no attempt is here made to reproduce the
reasoning. The proposition for the excise is " dangerous, oppressive and uncon-
stitutional," "alarming," "subversive of freedom," "fraught with impolicy,"
"inconsistent with political wisdom and equity," "pregnant with danger,"
" replete with blindest folly and indiscretion," " of essential injury to piety and
religion," "perpetually inimical to happiness," "a glaring violation of sacred
principles," "impervious in its spirit and troublesome in its operation," "con-
spicuous for inhumanity," " a source of great mortification and irretrievable
disadvantage," " an unparalleled oppression," " unjustly rigorous and meanly
ensnaring," " in an eminent degree ridiculous and contemptible," " totally in-
admissible," "precipitate and unnecessary," "utterly inexpedient," "fundament-
ally improper," "in no measure adequate to the end proposed," "rash and

Those who discuss the General Excise 51

Another controversialist, D'Anvers, tried to cover two
positions. He did not deny that excises were shifted to the
consumer, but he contended that they hurt the trader as well.
" Will this Gentleman pretend," he said, referring to an oppo-
nent, "that Taxes bring no Burthen, no Difficulty or Loss
upon the Trader, by taking the Money immediately out of his
Pocket, which He could otherwise employ to great Advantage,
and giving a Check to the Circulation of his Trade." x D'An-
vers laid down his general conclusion in the words " Taxes on
Trade have already deprived us of some valuable Branches
of it." 2

It may be queried, however, whether D'Anvers really
meant anything more than that taxes on trade are frequently
injurious to the general interests of commerce an opinion,
common enough in the writings of the seventeenth century,
which can be found well expressed in the celebrated work of
Lewes Roberts. 3 But the more precise question as to the
exact incidence of taxes on trade was more fully discussed in
connection with the duties laid on colonial sugar. It may be
interesting to mention a few of these writers, all of whom
maintain that the tax rests on the seller or sugar-planter.

The clear-headed author of one seventeenth-century tract
declares the assertion that the new sugar duty will be paid by
the buyer " a meer Mockery." For, " if an Impost be laid

impolitic," " essentially hostile to the fair trade," and " permanently disadvanta-
geous to the revenue." See esp. pp. 1-22.

1 He adds : " It is the Plenty, or Scarcity of any Commodity, in Proportion
to its Vent and Demand, which must always rule in these Cases, and by which
the Trader will make more or less Profit in his Dealings." The Second Part of
an Argument against Excises; in answer to the Objections of several Writers.
By Caleb D'Anvers of Gray's Inn, Esq. London, 1733, p. 19.

2 Ibid., p. 20. See also p. 41.

3 " When the customes upon Merchants goods is small, it easily draweth all
nations to trade with them; and contrariwise, where great impositions are laid
upon Merchants goods the traffike of the place, will be seen soone to decay, to
the prejudice of that place and Kingdom." The Treasure of Traffike, or a Dis-
course of Forraigne Trade. Wherein is shelved the benefit and commoditie aris-
ing- to a Common- Wealth or Kingdome, by the skilfull Merchant, and by a well
ordered Commerce and regular Traffike. By Lewes Roberts, Merchant and Cap-
taine of the City of London. London, 1641, p. 61.

52 Shifting and Incidence of Taxation

upon the Sugar, whoever pays it the Planter is sure to bear
it. What avails it though the Buyer pays the Duty, if the
Seller must presently allow it in the Price." 1 Where the price
of the article is practically fixed, he adds, as in the case of
beer, the brewer can easily add the tax to the price. But
where " the Price is uncertain, and a Bargain is to be driven,
and a Duty yet to be paid," the matter is very different. For
competition will compel the seller to take less. 2 The general
principle, he thinks, can be put as follows : " 'Tis not Imposi-
tions, but Plenty and Scarcity, that rules the Market. And it
is found by constant Experience, that where an Impost is laid
upon a Commodity in demand, there the Buyer may be
brought to bear some part of it. But if the Market be glutted,
and the Commodity be a Drug (as Ours is, and for ever will
be) ; in this case the Buyer will bear no part of the Duty, but
the Seller must pay it all." 3

In the fourth decade of the eighteenth century, the project
of a new duty on sugar led to a reconsideration of the ques-
tion. A number of writers now contended that the sugar
duty would be borne by the seller. To the extent that the
seller happened to be the planter, the theory would be equiv-
alent to the one discussed in the last section the theory,
namely, that the landowner would bear the burden. For in
this case the sugar planter would be at once the landowner and
the trader. Thus one pamphlet, written to prove that the
duty rests on the sugar-planter, argues that the important con-
sideration is the possible restriction of the supply. " Every

1 The Groans of the Plantations : or, a true Account of their Grievous and
Extreme Sufferings by the Heavy Impositions upon Sugar, and other Hardships,
etc. London, 1689 (reprinted 1698), p. 9.

2 " 'Tis not the Appointment of Law, but the Agreement of the Parties that
must decide the question. In our Case the Buyer will naturally be at this lock :
If you clear the Duty, I will give you so much for a Hundred of your White
Sugar; if I must pay it you must have seven Shillings less. Which is as broad
as long.

"The Buyer, they say, must pay the Duty, but sure the Seller may pay it if he
please. And he will please to pay it, rather then not sell his Sugar. If He will
not, there are enow beside that will." Ibid., p. 9.

8 Ibid., p. io.

Those who discuss the General Excise 53

one admits," says the author, "that Quantity and Vent give
a Price to any Commodity ; it is therefore to be considered
in what Cases the Quantity can be commanded or ascer-
tained, in proportion to the Vent, and in what Cases it can-
not ; for where it can, the Duties will lie on the Consumer ;
but where it cannot, it will evidently lie on the Producer or
Maker as often as the Quantity exceeds the Vent." 1 He
then proceeds to show by specific figures that in the case of
sugar the latter is true. 2 Another writer on the same subject
lays down the general principle in similar language ; 3 and
John Ashley, who comes to a like conclusion, states that
" Experience hath shewn, that all Duties laid upon Sugar
affects the Producer more than the Consumer." 4 One of
the last of the pamphleteers on this topic discusses the state-
ment that the taxes will be shifted to the consumer, but
urges in opposition that the price of sugar fluctuates accord-
ing to the quantity imported into the marts of Europe, with-
out reference to taxes imposed at any particular place. 5
Since it is far more difficult in the case of sugar than in that
of other commodities to apportion the supply to the demand,

1 The Axe (once more} Laid to the Root of the Tree. Published for the uni-
versal Benefit of Mankind and dedicated to the Landholders of the British Domin-
ions. By a Friend to Truth and the Christian Religion. London, 1743, pp. 1-2
of A Supplement on Taxes in General on British Sugar.

2 Ibid., pp. 9 and 21 of the Supplement.

8 " The Seller of a necessary Commodity can oblige the Buyer to pay it's
Taxes, in case the Quantity at Market is only equal to the Vent or Demand.
On the contrary, when the Quantity at Market much exceeds the Vent or
Demand, this is absolutely out of the Seller's Power; for the Plenty will influ-
ence, and keep down the Price, in spite of his utmost Endeavours." Considera-
tions against laying any New Duty upon Sugar, wherein is particularly shewn,
That a New Imposition will be ruinous to the Sugar Colonies. London, 1744,
p. 7.

4 The Second Part of Memoirs and Considerations concerning the Trade and
Revenues of the British Colonies in America. By John Ashley, Esq. London,

J 743 P- 79-

6 " Thus it appears that the Price of Sugar fluctuates according to the Quan-
tity imported into Europe, without any regard to any advanced Duties." The
State of the Sugar Trade ; shewing the Dangerous Consequences that must attend
any additional Duty thereon. London, 1747, p. 4.

54 Shifting and Incidence of Taxation

he thinks the net result will be that the taxes will finally fall
on the planter. 1

Reviewing the authors treated in this chapter, we see that
the discussion of the excise called forth almost every conceiv-
able theory as to its incidence. Some thought that the tax
was not shifted at all, some maintained that it was shifted to
the landowner, some believed that it was shifted to the con-
sumer, and some contended that it was again shifted by these
to the employers of labor. These views were advanced with
all degrees of confidence but, with few exceptions, with little
grasp of fundamental economic principles. Among the asser-
tions and proofs, however, we found here and there some
interesting premonitions of modern theories. Although we
cannot speak of any unanimous or authoritative doctrine, the
better opinion, as we have seen, and the one which gradually
gained an ever-increasing number of adherents, was that
the excise tends to be shifted to the consumer, and that it
augments the burdens resting on the mass of the laborers.
In this way scientific opinion gradually came to harmonize
with the popular view.

1 " Nor can the Quantity be proportioned or ascertain'd according to the
Demand, as in the Case of many other Commodities, from the great Charge in
settling a Sugar-Plantation, the long growth of the Sugar Cane, the uncertain
Produce, and many other Reasons." His conclusion thus is that " the Price of
Sugar is govern'd by the Quantity and that the Duties lie on the Planters."
The State of the Sugar Trade, pp. 4, 6. Cf. p. 1 6. A similar argument may be
found in Reasons, grounded on Facts, shewing that a new Duty on Sugar must
fall on the Planter, and that a new Duty will not certainly encrease the Revenue.
London, 1748.

CHAPTER II
THOSE WHO FAVOR A SINGLE TAX ON LUXURIES

As we have already seen, confidence in the general excise
in the sense of a tax on the producer or dealer, which
was deemed by the great mass of writers to be an indirect
tax on the consumer, gradually weakened during the eigh-
teenth century. Partly because it was no longer deemed
equitable that the poorer consumers should bear the burden,
partly because it was supposed that these taxes were prejudi-
cial 4 to trade, the idea of an indirect tax on consumption in
general was now replaced by that of a direct tax on certain
particular kinds of expenditure. Instead of levying a tax in
first instance on the producer or dealer, it was now proposed
to lay one directly on the consumer ; and instead of making
the general consumer bear the burden, it was planned to tax
only the purchaser of certain luxuries. In short, in lieu of
an indirect tax on necessaries, we now meet with the scheme
of a direct tax on luxuries.

The earliest inkling of such a plan is probably to be found
in a seventeenth-century work of Chamberlayne. This writer
gives all the details of a scheme which he sums up in the prop-
osition that "upon all such Commodities as occasion either
Excess or Luxury, Wantonness, Idleness, Pride or Corruption
of Manners there may be laid a large and extraordinary Im-
post." l But from his reference to " the practice of neigh-
bour Nations " it is not quite certain whether Chamberlayne
is here speaking of a direct or an indirect tax on luxuries.

1 Englands Wants or several Proposals probably Beneficial for England,
humbly offered to the Consideration of all good Patriots in both Houses of Parlia-
ment. By a true Lover of his Country. [Edward Chamberlayne.] London,
1667, p. 4.

55

56 Shifting and Incidence of Taxation

This doubt, however, does not exist in the case of another
writer, toward the end of the century, who was careful to
recommend taxes on commodities " payable by the Buyer "
or " Consumptioner." l That he refers to luxuries appears
clearly from his statement that, according to the scheme as
elaborated in the monograph, "all Persons Tax themselves
according to such Degrees as their Extravagancies shall
prompt to exceed the Decent and Necessary Uses of them."
The author discusses the objection that, as the purchaser
is apt to be overreached anyway, the tax ought to be paid
by the c< seller who gets prophet." 2 His reply is threefold :
first, if the goods are not sold, the dealer pays nothing;
second, the seller is under no temptation to increase the
price by more than the tax; third, there is less chance of
evasion. 3 The tax, he concludes, rests where it is imposed,
and cannot be shifted.

During the seventeenth century, these isolated proposals
met with little support. It was not until shortly before the
middle of the eighteenth century that the doctrine was put for-
ward in so authoritative a manner as to command attention.

The plan of a single tax on luxuries was unfolded in
an anonymous work, 4 the authorship of which is doubtful

1 To the Honourable the Knights, Citizens, and Burgesses of the House of Com-
mons in Parliament assembled, Proposals most humbly offered for Raising (in
all Likelyhood) upwards of Five Millions of Money, -without Charging the Poor, or
Burthening the Rich, by such Ways and Means, that (for the greatest part therof}
the Payers will voluntarily Tax themselves. [By J. M.] London, 1696, p. i.

2 " It may probably be objected, that 'twill be hard on the Buyer, who parts
with his Money for anything herein named, to pay the Tax, when perhaps he may
be out-reach' d in the price; therefore more reasonable to be paid by the seller
who gets prophet." Ibid., pp. 4, 5.

3 " The Answer hereunto is Obvious, if Consider'd, that first, none will be
Burthen'd with Taxes for any Commoditie, that lies on hand dead and unsold :
Secondly the seller is debarr'd of any Just pretensions for Inhancing the price
thereof, beyond the usual Value . . . : and Lastly, the Tax will more certainly be
pay'd, for no seller will put himself at the Mercy of any Informing Buyer, since it
comes not out of his, but the Buyers Pocket." Ibid., p. 5.

4 An Essay on the Causes of the Decline of the Foreign Trade, consequently of
the Value of Lands of Britain and on the Means to Restore Both. Begun in the
Year 1739. London, 1744.

Those who favor a Single Tax on Luxuries 57

even to this day. By some it is ascribed to Richardson,
by others to Decker, with the probabilities in favor of the
former. 1 The author was careful to emphasize his opposi-
tion to general excise duties " because of the great preju-
dice they do to trade." His plan was to lay " One Tax
on the Consumers of Luxuries and take off all our other
Taxes, Excises, and Customs." 2 He gave a catalogue of the
few articles he wished to have taxed. 3 It goes without say-
ing that, in his opinion, the tax would remain where it
was put. "The greatest benefit of All," he added, "is that
this Proposal hath not those extending, pernicious, Trade-

1 For the grounds on which the authorship is ascribed to Decker rather than
to Richardson, see the article in Palgrave's Dictionary of Political Economy, i,
p. 519. To the authorities quoted there may be added the statements in Tucker,
A Brief Essay on Trade, 1750, pp. 129-149; in Nickolls, Remarks on the Advan-
tages and Disadvantages, etc. (quoted a few notes below), pp. 264 and 268;
and in Arthur Young, Political Arithmetic, p. 244, in all of which it is also
ascribed to Decker. Professor Conner, the author of the article in the Dictionary,
states that the edition of 1749 bears Decker's name on the title-page. It is to be
remarked, however, that the later (Edinburgh) edition of 1756 (a copy of which,
together with one of the original edition, is in the possession of the present writer)
is anonymous. The strongest argument against its ascription to Decker is that
Decker is known to be the author of another tract of almost the same date advo-
cating a single tax on houses (see below, pp. 60, 6i),and that, in many works
of the fifties and sixties, when Decker's scheme is mentioned at all, the reference
is to the house tax. See especially below, pp. 62, 63. It seems improbable
that two such different projects should have been advanced by the same writer,
without making in the later work any reference at all to the plan of the former.
Professor Cunningham is also of the opinion that Decker cannot be the author.
See 7"he Growth of English Industry and Commerce in Modern Times, 1892,
p. 409, note 3. At the same time, it is to be noted that Arthur Young in his
Political Arithmetic ascribes both works to Decker, and speaks (p. 214) of the
tax on houses as Decker's " favorite scheme." Yet it was the earlier one, or at
all events the one first published.

2 An Essay, etc., p. 44.

8 Adam Smith, who refers to his " well known proposal " to tax " all com-
modities " ( Wealth of Nations, book v, chap, ii; Rogers' ed. ii, p. 474), as well as
Bastable (Public Finance, 2d ed., 1895, p. 318), who speaks of his " plan of a
license for the consumption of commodities," are not quite exact. For the plan
was not to tax " commodities " or " all commodities," but only certain " articles of
luxury." One of the chief recommendations of the scheme to the author is that
it will act as a " Sumptuary-Law to keep all People in their proper Stations."
An Essay, etc., p. 51.

58 Shifting and Incidence of Taxation

destroying Consequences of our present Taxes; for it will
not raise the Value of any one Commodity, but rather, by
checking Luxury, the Bane of Virtue and Industry, we shall
become a rich and flourishing People." 1

An enthusiastic advocate of this scheme for a single tax is
to be found in Josiah Tucker, who outlined the plan in an
appendix to one of his important works. 2 Tucker's chief
reason for the proposal is contained in his general principle
that "it is just and reasonable each Person should pay in
proportion to what he Uses of any Commodity: Now the
most probable Grounds we can go upon (for the affair will
not admit of Certainty and Demonstration) is, That Persons
in general live in Proportion to the Figure they make." 3
Hence to tax a man according to his expenditures for luxu-
ries constitutes the most equitable method of taxation. An-
other advocate of the scheme was Nickolls, 4 whose reasons
for opposition to the general excise have already been
mentioned. 5 After giving an interesting statement of his
general philosophy of taxation, 6 he concludes that "a free
tax bearing solely upon the different articles of luxury, and
consumption (those of absolute necessity excepted) seems
the properest to fulfill these intentions." He approves the

1 An Essay, etc., p. 52.

2 A Brief Essay on the Advantages and Disadvantages which respectively
attend France and Great Britain with Regard to Trade. The appendix is
entitled An Appendix containing a Plan for raising one only Tax on the
Consumers of Luxuries. [By Josiah Tucker.] London, 2d ed., 1750. See esp.
pp. 123-135 and 145-166.

3 Ibid., p. 153.

4 Remarks on the Advantages and Disadvantages of France and Great Britain^
etc. [By Sir John Nickolls.] London, 1754.

5 Above, p. 29, where the exact title is given.

6 " The consideration of the different taxes which constitute the Revenue of the
State, and of the inconveniences of each, naturally leads a Patriot to the desire of
finding the means of taxing all the articles which could, and ought to be made
contribute, in the justest, easiest, equalest manner, to the Public charge; that is
to say, of taxing every subject in proportion to the advantage he draws from
Society : insomuch, that with respect to him who has no property, so far from
depriving him of the hopes of acquiring any, the influence of the taxes should be
no more than a gentle spur to his industry, and that it should fall reasonably, and

Those who favor a Single Tax on Luxuries 59

scheme as developed by its original author, 1 and favors it
especially because the amount spent on each class of luxuries
may be regarded as a rough index of the income enjoyed
and disposable for such a purpose. 2 Finally, among the
other writers who favored this plan, which was soon
adopted, not, indeed, as a single tax, but as a supplement
to existing taxes, may be mentioned Forster, the deter-
mined opponent of all taxes on wages, and to a certain ex-
tent Postlethwayt. 3 With the incorporation of certain taxes
on luxuries into the general scheme of the English revenue
system, the discussion of the proposition soon ceased.

not arbitrarily upon those who have some property, that is to say, in proportion to
the real and personal estates they enjoy." Ibid., pp. 268, 269.

1 Nickolls ascribes it to Decker.

2 " He takes each of these articles for the sign of a fortune of such a certain
revenue, upon which he is imposing a tax of three pence for every pound ster-
ling." Ibid., p. 269.

8 An Enquiry into the Causes of the Present High Prices of Provisions. [By
Nathaniel Forster.] London, 1767. Part I, chap, iii, "Of Taxes," pp. 50-53.
For the modified advocacy of Postlethwayt, see below, p. 62.

CHAPTER III
THOSE WHO FAVOR A SINGLE TAX ON HOUSES

THE revenue reformers of the eighteenth century were
fond of schemes for a single tax. Once granted that taxes
on consumption rest on the consumer, and that it is wise to
avoid the incidental interference with trade which would
result from taxes levied on the trader, it was but a step
further to contend that a single tax on luxuries, which at all
events necessitates a scrutiny into the luxurious expenditures,
might be improved upon. By taking some one criterion of
expenditure, which was not only universal but patent to all,
the same results might be reached with much less difficulty.
The desired criterion, it was now suggested, was the build-
ing occupied. Instead of a general excise, it was proposed
to lay a single tax on houses.

The chief advocate of this scheme was Sir Matthew
Decker. 1 He starts out with the idea of a tax or license
duty on the consumers of tea, to replace the tax on the im-
porters or dealers. But, passing by this as a matter of
minor importance, he proceeds to make the suggestion for a
"general excise." This, he is careful to explain, differs
entirely from what is generally associated with that name.
His scheme, so he tells us, means only "one single Excise-
Duty, and that upon Houses." 2 He discusses its character-
istics at great length, and states its chief merits as follows :

1 Serious Considerations on the several High Duties which the Nation in general
(as well as its Trade in particular} labours under : with a Proposal for prevent-
ing the Running of Goods, discharging the Trader from any Search, and raising
all the Publick Supplies by One Single Tax. By a Well- Wisher to the Good
People of Great Britain. [Sir Matthew Decker.] London, 1743.

2 Ibid., p. 15.

60

Those who favor a Single Tax on Houses 61

" All Duties being abolished, it would prevent all Manner of
Running and hinder the Ruin of many Thousands of poor
unhappy Creatures, which have been, or are still employed in
the Smuggling Trade " ; furthermore, " it would set the Mer-
chant and Shopkeeper free from a Multitude of false and
vexatious, or frivolous Informations, which may now be
lodged against them " ; and, above all, it would enable " the
Merchant as well as Shop and Warehouse-Keeper to trade
with Half the Stock, and make his Profit the same, or rather
increase it." J

Everywhere we find the emphasis put on the interests of
production and trade, because of the opinion that, in the long
run, these interests are the important ones to be considered.
This appears clearly from his views as to taxes on the work-
ingmen. Although Decker, indeed, desires to exempt the
houses "of the lowest and poorest Sort of People," he puts
his demand on the express ground that " thereby their Labour
might become so much the cheaper." 2 The incidence of
taxes on necessaries, therefore, according to Decker, is really
on the employer, and not on the laborer. His general idea
of favoring production and trade may be seen also from the
close of his exposition, where he expresses the hope that it
may be said of England, as formerly of Tyre, "that their
Merchants are Princes and their Traffickers the Honourable
of the Earth." 3

Decker's project was greeted by a number of enthusiastic
followers. Most of these preferred the single tax on houses
to the general excise on the ground that the former would
bear less heavily on the producer and the trader, since lower
taxes on necessaries would mean lower rates of wages. Thus,
the author of an anonymous tract, in speaking of a new plan
to be " substituted in the room of our present preposterous

1 Ibid. , p. 23.

2 " And the Goods," he adds, " which are the Produce of their Labour, might,
by this Means, be sold at as low, or even a lower Rate than can be afforded by
other Nations." Ibid., p. 16.

8 Ibid., p. 32.

62 Shifting and Incidence of Taxation

Method of Taxing," said that "a more advantageous Scheme,
not altogether unlike that of Sir Matthew Decker's might
be proposed, which would exempt the Laborious from every
Tax ; by which the landed Interest and all the useful Mem-
bers of the Community would be considerable Gainers." 1
So also Postlethwayt held that an artificial rise of wages
through taxes was injurious to the laborer as well as to the
whole community, and put the query "Whether the Encrease
of Taxes in our State do not all somehow ultimately termi-
nate upon our Trade and Commerce." 2 To avoid this result
he favored " One moderate and equal Tax upon Houses,"
or, as he puts it in another place, "some one general tax,
either upon houses or otherwise." 3 Postlethwayt, it will be
seen, was not quite sure in his mind as to the advisability of
a single tax on houses ; later he even suggested as an alterna-
tive the single tax on luxuries. 4 Another writer, Fauquier,
with whose vigorous opposition to the excise we have already
become acquainted, also approved Decker's scheme. His
argument was simple. " Since the Consumer pays the whole
of the Tax, it must be equal to him, when he maturely weighs
it, how or on what it is laid. All that really concerns him,
is that he should pay as little as the Exigencies of the State
will admit of; and that the whole of what he does pay
should, if possible, go clear of all Deductions into the Ex-
chequer, to answer the Purposes for which it was levied." 5

1 The Case of the Five Millions fairly stated in regard to Taxes, Trade,
Law, Lawyers, etc. Addressed to the Guardians of our Liberty. London, 1758,
p. 17.

2 Great Britains True System wherein is clearly shewn, That an Increase of
the Public Debt and Taxes must, in a few Years, prove the Ruin of the Monied,
the Trading and the Landed Interests etc. Humbly submitted to the Consideration
of all the Great Men, In and Out of Power. By Malachy Postlethwayt, Esq.
London, 1757, p. 132.

8 Ibid., pp. 130, 134.

4 " A free tax, bearing solely upon the different articles of Luxury and Con-
sumption (those of absolute Necessity excepted)." Ibid., p. 319. See above,

P-59-

6 An Essay on Ways and Means, etc. By F. F. London, 1756, p. 22. For
the full title of the work, see above, p. 17, note 7. Fauquier really approved of

Those who favor a Single Tax on Houses 63

A few writers accepted the principle of this scheme, while
desiring to modify it by substituting windows for houses.
The earliest advocate of this single tax on windows, Horsley,
advanced his scheme immediately after Decker had pub-
lished his plan. 1 Horsley, it appears, cared more for the
" singleness " of the tax than for anything else. " It seems
to me no otherwise material," he tells us, "what you lay the
Duty on, so it be a single Duty." 2 The same idea of "con-
solidating every imposition whatever," in order to "fix it
altogether on windows," was advanced by another writer 3
a few decades later, when all single tax ideas had about
gone out of fashion.

Decker's project for a single tax on houses soon met with
determined opponents. Of these, the most prominent was
Massie. In his earlier work, written to controvert the plan
as set forth by Fauquier, 4 Massie disclosed only a moderate
opposition. 5 But in the following year he turned his bat-
teries in full force against Decker himself. 6 He specifies
all kinds of objections upon which it is not necessary here to
dilate, farther than to state that he condemns the single tax

Decker's scheme, only with some modifications. See An Essay, p. 26. He even
suggested a capitation tax as an alternative. Ibid., p. 32 ; and more decidedly
in the postscript to the second edition, published the same year.

1 Serious Considerations on the High Duties examined : addressed to Sir
Matthew Decker : By Mr. Horsley. London, 1744.

2 Ibid., p. 32.

8 Considerations on the National Debt and nett Produce of the Revenue : with a
Plan for consolidating into one Rate the Land and all other Taxes, by which More
Money will be raised; Individuals not pay half the present Taxes; Smuggling
altogether prevented ; . . . the poor exempted from every Contribution, etc. By a
Merchant of London. London, 1784. See esp. p. 31.

4 Observations upon Mr. Fauquier's Essay on Ways and Means for raising
Money to support the present War without increasing the Public Debts, etc.
By J. M. [Joseph Massie]. London, 1756.

6 He objects more to the amount to be raised, than to the manner of rais-
ing it.

6 The Proposal, commonly called Sir Matthew Decker's Scheme for one General
Tax upon Houses, laid open ; and shewed to be a deep concerted Project to traduce
the Wisdom of the Legislature; disquiet the Minds of the People ; and ruin the
Trade and Manufacturies of Great Britain. [By Joseph Massie.] London,
'757-

64 Shifting and Incidence of Taxation

on houses as really "a Proposal to raise all the Public Sup-
plies by one General Tax upon the Commodities and Manu-
factures of Great Britain." So far as the incidence of the
tax is concerned, he believes that it will be shifted to the
consumer ; for, " whatever Money a Farmer, a Tradesman, or
a Merchant pays for Taxes is, and must be repaid him in the
Prices of the Commodities he deals in." 1 He favors the
existing land tax because it finally falls on the landowner. 2
In respect to the incidence of the other taxes, he seems to
revert to the old theory that " the Taxes of this Kingdom are
so wisely laid, as to encourage Industry and good Husbandry,
by discouraging their Opposites." 3 Somewhat later Arthur
Young also opposed Decker's scheme and the theory of inci-
dence on which it was based. Taxes on houses, he thinks,

1 The Proposal, p. 114. He adds in another passage: "They are, in reality,
Factors between the Landholders and Consumers of Commodities ; and every Man
knows, that a Factor must be paid Commission for the Goods he sells, over and
above all Taxes and other Charges." Ibid., p. 116.

2 " The Land-Owners cannot sell or lett their Lands for more Money, because
they pay this Tax out of their Rents ; for a Buyer of Land considers what Money
it will bring for his own use; and a Farmer of Land must consider what Prices
his Corn, Cattle, Wool, Butter, Cheese, etc., will fetch at Market. . . . And
as the Prices of these Commodities are, and necessarily must be governed by
the Money that People in general can afford to pay for them (Years of Scarcity
excepted), the Land-Tax must fall upon the Land-Owners." Ibid., p. 38. Cf.
also p. 104.

8 Ibid., p. 68. That Massie set his face sternly against any further increase of
taxation is shown by two interesting pamphlets, in which he has not a little to say
about the question of incidence. See Reasons humbly offered against laying any
further British Duties on Wrought Silks of the Manufacture of Italy, the King-
dom of Naples and Sicily, or Holland : shelving the probable III Consequences of
such a Measure in regard to the Landed Interest, Woollen Manufactures, Silk
Manufacturies, Fisheries, Wealth and Naval Power of Great Britain. London,
1758. This contains a bibliography of Massie's writings up to that date. Cf. also
his Observations on the new Cyder- Tax, so far as the same may affect our Woollen
Manufacturies, Newfoundland Fisheries, etc. London, 1764. For Massie's atti-
tude on the question of the shifting of taxes to the poor, see above, p. 44. In his
two other important tracts on taxation, Massie rather neglects the subject of inci-
dence. See his Calculations of Taxes for a Family of Each Rank, Degree, or
Class for one Year. 1756. A reply to this was made by Bourchier Cleeve, and
a rejoinder by Massie in A Letter to Bourchier Cleeve, Esq., concerning his Calcu-
lations of Taxes. 1757

Those who favor a Single Tax on Houses 65

force a man to pay not because he consumes, but because he
possesses ; the one [the excise or the tax on consumption] is
a proof he is able to pay, the other [the tax on houses] no
proof of it at all. 1 This is the last reference to the scheme,
for with the introduction, shortly after, of the tax on inhabited
houses by Lord North the agitation for a single tax of this
kind came to an end.

1 Political Arithmetic. By Arthur Young. London, 1774, chap, iii, sec. i, esp.
p. 214. During the revolutionary era in France a similar scheme for a single tax
on houses was again advanced as an entirely novel idea. See Plan de Revolution
concernant les Finances, ou Decouverte Consolante de Vlmpbt Unique du Toise.
Par M. Blanc-Gilli, de Marseille. Paris, 1790. See esp. the Supplement a la
Decouverte de V Impbt du Toise, pp. 78 et seq.

CHAPTER IV
THOSE WHO FAVOR A GENERAL PROPERTY TAX

BY the close of the seventeenth century the old general
property tax in England had become in fact what it soon
became in name a land tax. 1 There was not lacking then,
as now, a group of writers who believed that the panacea
for existing evils was to be found in the reimposition of a
tax on the various kinds of personal property, and espe-
cially of intangible personalty. This belief most commonly
took form in demands for a tax on moneys at interest, sup-
plemented a little later by calls for a tax on the evidences of
debt or on funds in general. All these demands were based
on the theory that a tax on loans would fall on the lender.

The earliest formulation of such a demand is found in a
work of the younger Culpeper. 2 Taxes on land, says he,
fall on the landowner, while taxes on trade and luxury rest
there and leave the usurer free. 3 Taxes on moneys at inter-
est, however, would not only diminish the curse of usury,
but since they fall on the lender, they would raise the value
of land, which now bears far more than its proportion of
taxes.*

1 See Seligman, Essays in Taxation, 2d ed., 1897, PP- 45~4 8 -

2 The Necessity of Abating Usury re-asserted; in a Reply to the Discourse of Mr.
Thomas Manley entituled, Usury at Six per Cent, examined, etc., together with a
Familiar and inoffensive way propounded for the future Discovery of summes at
Interest, that they may be charged with their equal shares of Publick Taxes and
Burthens, etc. By Sir Thomas Culpeper, Jun., Knight. London, 1670. For
Manley's treatise, and his views on the question, see above, p. 31. For an
earlier work of Culpeper, and his views, see above, p. 13.

3 Ibid., pp. 5-7.

* " I cannot but with trouble reflect, that Land and Trade should so conspire to
play the Usurers game against themselves, as by their discord all along they have

66

Those who favor a General Property Tax 67

Another writer, who entered more thoroughly into the dif-
ficulties connected with the problem of incidence, was not
blind to the fact that in the ordinary course of events, a tax
on interest tends to be shifted to the borrower. He believed,
however, that this might be prevented by an act of Parlia-
ment, and that the tax might be enforced through a compul-
sory registration of all debts and mortgages. 1 In the same
way, Davenant, who thought that " there is nothing too hard
for the wisdom of a parliament to bring about,'* proposed a
tax on " the usurers, who are the true drones of a common-
wealth, living upon the honey without any labour." 2 This
was, however, only a passing fancy of Davenant, whose fun-
damental theory of incidence was somewhat different. 3

Other writers wished to include not only moneys at interest,
but all kinds of personalty, to form a general property tax.
Thus, one author, who objected to the "sole Land-Taxes/' 4
demanded that "Sums at Interest with all other Liquid
Revenues shall pay the Quota in a due proportion with our
Land-Rents." This " due proportion," as he soon attempts

done; The trader crying, taxe Land, in Gods name, for that will bear it, trade
cannot; And the Land-lord of late, spare Land, for Gods sake, it hath already
been taxed to death; Taxe now our superfluous trade, and therein our luxury;
Giving, it seems, the Usurer over to his Reprobate sense, and therefore freely
permitting him to thrive in this World; But little, in the mean time, considering,
that tillage and traffick lay in one belly the Earth, sayle in one bottom upon the
Sea, and fear one Pyrate or vermine, the Usurer." Ibid., p. 15.

1 A Plain and Easie Way for the Speedy Raising of Money to supply their
Majesties Present Occasions : which will also, -very much tend to the Advancing the

Value of Lands. By a Divine of the Church of England. London, 1691. Cf.
esp. pp. 12, 30, 31.

2 These, he thinks, " should, of all people, be brought in to bear their propor-
tion of the common burden." "As yet," he adds, " they could never be effectually
reached but they may be fetched in by the wisdom of a parliament, if the house
of commons would please resolutely to set themselves about it." An Essay upon
Ways and Means of supplying the War. [By Charles Davenant.] London,
1695. Reprinted in Collected Works of Davenant, edited by Whitworth. Lon-
don, 1771. Cf. vol. i, p. 57 of the reprint.

8 See below, p. 73.

4 A Letter from a Gentleman to his Friend, by way of Answer to one from Him,
shewing the Present Expedient and Easiness of Equal Taxing. [By R. S.]
London, n.d. [about 1692], p. 10.

68 Shifting and Incidence of Taxation

to prove, is a considerably higher rate than that levied on
land. 1 Two other writers of about the same date, whose
views on the excise have already been mentioned, 2 were also
heartily in favor of this scheme. The one thought that a
tax on personalty joined to the tax on lands would form "a
mixed and comprehensive Quota, or Tax upon all Abilities " ; 3
the other simply desired the reimposition of the " Subsidy or
Pound Rate as the Ancient Methods of our Ancestors." 4
De Foe also, at the end of the century, objected not only to
the taxes on the poor, 6 but to the inequality of the land tax, 6
which he thought might be remedied by assessing every one
according to his stock of property. 7

A few years later the same scheme was propounded in a
work written to advocate the taxation of annuities and of
shares in the East India Company and in the Bank of Eng-
land, as well as of moneys at interest. 8 The author's ideal
was a " just and equal Tax, obliging all Ranks and Degrees of

1 He demands that " all the Liquid- Rents be charged to pay either the double,
or at least one Third part more than the Land-Rents, which are so sensibly liable
to grievous endless Repairs, with abundance of other Charges, vast trouble oft-times
in Managing, and by daily sad Experience, severe Casualties and Losses." A
Letter from a Gentleman to his Friend, p. II.

2 Above, pp. 22 and 47.

3 A Letter from a Gentleman in the Country to his Friend in the City : touch-
ing Sir William Petty's Posthumous Treatise entitled Verbum Sapienti. Lon-
don, 1691, p. 15.

* An Essay upon Taxes calculated for the Present Juncture of affairs in Eng-
land. London, 1693, PP- 20-24.

5 " In a General Tax, if any shou'd be excus'd, it shou'd be the Poor, who are not
able to pay, or at least are pinch'd in the necessary parts of Life by paying."
An Essay upon Projects. [By Daniel De Foe.] London, 1697, P- v "-

6 " And not to run on in Particulars, I affirm, That in the Land-Tax Ten certain
Gentlemen in London put together, did not pay for half so much Personal Estate,
call'd Stock, as the poorest of them is reputed really to possess." Ibid., p. xi.

7 " If I were to be ask'd how I wou'd remedy this ? I wou'd answer, It shou'd
be by some Method in which every man may be tax'd in the due proportion to his
Estate, and the Act put in execution, according to the true Intent and Meaning of
it ; in order to which a Commission of Assessment shou'd be granted to Twelve
Men." Ibid., p. viii.

8 An Essay concerning the Necessity of Equal Taxes ; and the Dangerous Con-
sequences of the Encouragement given to Usury among us of late Years. With some

Those who favor a General Property Tax 69

men to pay to the support of the Government in proportion
to their share in the Publick, and the benefits they reap from
it." 1 This ideal, he thought, could be reached "by taking
of Money, according to its product in Interest, as it were so
much a year in Land." 2

The time for such projects, however, had already passed,
although the proposition was occasionally revived. Wagstaffe,
for instance, at the beginning of the eighteenth century,
painted in glowing colors the defects of the existing system. 3
" If a General Excise, and any other Provision for an equal
Tax may be feasible," he added, " no Man shall more readily
embrace it than myself." In default of any such scheme, how-
ever, he outlined his plan for a tax on personal property, and
engaged "to shew that it will be so far from being Prejudi-
cial to the Trade of the Nation, that 'tis the only way to
Encourage and Support it." 4 In the fifth 5 and sixth 6 dec-

Proposals to promote the Former and give a Check to the Latter. By the author
of The History of the Last Parliament. London, 1702. This was probably
written by James Drake, M.D., although it is also ascribed to Sir Richard
Blackmore (as in the Manchester Free Library catalogue).

1 Ibid., p. 5.

2 Ibid., p. II. "Till such a Scheme for raising Money," he says in another
place, *' may be contriv'd, as shall reduce Money and Land to a just proportion
in the expences of the Nation, the Publick will always lean on the wrong side,
and be in a tottering condition." Ibid., p. 3.

8 The State and Condition of our Taxes considered ; or, a Proposal for a Tax
upon Funds : shewing the Justice, Usefulness, and Necessity of such a Tax, in
respect to our Trading and Landed Interest, and especially if we engage in a new
War, etc. By a Freeholder [William Wagstaffe]. London, 1714. A similar
plan is found in Fair Payment no Spunge, etc. 1717. See above, p. 27.

4 The State and Condition of our Taxes, p. 16.

6 Pro Commodo Regis et Populi. Publick Funds for Publick Service, by raising
Three Millions of Money, or a Million and a Half, with Ease and Ability, without
Charge of Collecting, or affecting Land or Trade, or burdening Tax upon Tax.
In an Appeal to the Impartial and Common Understanding of all Mankind.
London, 1744. The author bases his claim on the following argument: "The
Land is the Wealth of the Country, has it's natural, and artificial Product, The one
the Fruits of the Earth, the other the Manufactures and Labour of it; But if it is
solely loaded with constant heavy Taxes, it's Possessors generally will be poor."
p. 19. C/.p. 17.

6 Thoughts on the pernicious Consequences of borrowing Money. London,
I759-

70 Shifting and Incidence of Taxation

ades of the eighteenth century we again meet with allusions
to the scheme. But the current of opinion, as well as the
actual practice of the day, was so strongly against the
scheme of a tax on personal property that very few writers
took the trouble formally to refute the reasoning on which
it was based. One or two, indeed, attempted to show that
the reduction in the rate of interest on the funds was in
effect a tax on funds. 1 But such an obviously weak argu-
ment was not necessary. Little more was heard of the plan.

1 " A Reduction of Interest is to all Intents and Purposes a Tax." A Serious
Address to the Proprietors of the Publick Funds, occasioned by several late Schemes
for Reducing their Interest or Subjecting them to Taxes : in which the Rights of
Publick Creditors are explained and asserted, their just claim . . . to an exemp-
tion from Taxes fully demonstrated, etc. Humbly submitted to the Consideration
of the Members of the House of Commons. London, 1744, p. 41. " Those who
say that Land and Trade have borne all the Burthen," adds the author, " & that
such as have lent their Money to the Publick have paid nothing, really beg the
Question, and take that for granted which it is not in their Power to prove, nay
the very reverse of which is true." Ibid., pp. 36, 37.

CHAPTER V
THOSE WHO FAVOR A SINGLE TAX ON LAND

THE theory that all taxes are finally shifted to the land-
owner is commonly ascribed to the Physiocrats. Yet the
same theory was expounded in England long before their
time. The first inkling of the doctrine is found in a cele-
brated seventeenth-century tract, in which the author con-
tends that the landowners " bear all the Taxes and publick
burthens ; which in truth are onely born by those who buy and
sell not ; all sellers raising the price of their commodities, or
abating of their goodness, according to their Taxes." 1

This theory of incidence was, however, worked out much
more fully by John Locke. He lays down his general thesis
in the words : " Taxes, however contrived, and out of whose
Hand soever immediately taken, do, in a Country, where the
great Fund is in Land, for the most part terminate upon
Land." 2 To prove this, Locke first attempts to show that a
tax levied on the landowner cannot be shifted. If the
" country gentleman " actually pays the tax out of his own

1 Reasons for a Limited Exportation of Wooll. 1677, p. 5. The author also
states that the landowners " are Masters and Proprietaries of the foundation of all
the wealth in this Nation, all profit arising out of the Ground, which is theirs."
Therefore it is much more to the interest of the nation to " preserve the Nobility,
Gentry, and those to whom the Land of this Country belongs then a few Artificers
imployed in working the Superfluity of our Wooll or the Merchants who gain by
the exportation of our Manufacture." This tract was written as a reply to Eng-
land's Interest by Trade asserted, shewing the Necessity and Excellency thereof,
etc. By W. C. (William Carter), a Servant to his King and Country. London,
1671. It was in turn answered by Carter in A Reply to a Paper Intituled
Reasons for a Limited Exportation of Wooll, or Objections against England's
Interest. London, 1689.

2 Some Considerations of the Consequences of the Lowering of Interest, and
Raising the Value of Money. In a Letter to a Member of Parliament. [By

72 Shifting and Incidence of Taxation

pocket, says Locke, he certainly feels the burden. But " this
influences not at all the yearly Rent of the Land, which the
Rack-renter or under Tenant pays ; it being the same thing to
him, whether he pays all his Rent to the King or his Land-
lord." For the " Tenant's Bargain and Profit is the same,
whether the Land be charg'd, or not charg'd with an Annuity
payable to another Man." The landowner, in other words,
cannot shift a land tax. 1

But how is it, if taxes are levied not on land but on com-
modities ? A tax on commodities, says Locke, must raise the
price of the commodities to the consumer. " Let us see now
who at long run must pay this and where it will light." " 'Tis
plain, the Merchant and Brokre, neither will nor can; for
if he pays more for Commodities than he did, he will sell
them at a Price proportionably raised." On the other hand,
the "poor Labourer and Handicraftsman cannot; for he just
lives from hand to mouth already." The consequence of a
tax on the laborer will be either that " his Wages must rise
with the Price of things, to make him live, or else, not being
able to maintain himself and Family by his Labour, he comes
to the Parish ; and then the Land bears the Burthen a heavier
way." But if the laborer's wages rise, the farmer who must
pay " more for Wages as well as other things, whil'st he sells
his Corn and Wool, either at the same rate, or lower, at the
Market (since the Tax laid upon it makes People less for-
ward to buy) must either have his Rent abated, or else break'
and run away in his Landlord's Debt, and ... so the yearly
Value of the Land is brought down, and who then pays the
Tax at the years end but the Landlord ? " 2

A tax on commodities imported, he continues, will always
be shifted from the merchant to the consumer. In fact, the
importer will generally expect a profit and " raise his price

John Locke.] London, 1692, p. 87. The date of this work is generally given as
1691. But although the epistle dedicatory bears the date of Nov. 7, 1691, the book
itself has the imprint 1692. The passage quoted in the text may also be found
reprinted in the Collected Works of John Locke, I2th edition, 1824, vol. iv, p. 55.

1 Some Considerations, pp. 88, 89.

2 Ibid., p. 91.

Those who favor a Single Tax on Land 73

above what his Tax comes to." For "you must not think
that the raising their Price will lessen the vent of fashionable,
Foreign Commodities amongst you." 1 With the produce of
land it is different. " Your Landlord being forced to bring
his Commodities to Market, such as his Land and Industry
afford him, common and known things, must sell them
there at such price as he can get." When a tax is laid on
these "homebred Commodities," which are seldom "the
Favourites of your people, every one makes as sparing a use
of them as he can ; " prices will fall and rents will decrease.

Hence Locke concludes in the famous passage : " It is in
vain, in a Country whose great Fund is Land, to hope to lay
the publick charge of the Government on anything else, there
at last it will terminate. The Merchant (do what you can)
will not bear it : the Labourer cannot, and therefore the Land-
owner must ; and whether he were best to do it, by laying
it directly where it will last settle, or by letting it come to
him by the sinking of his Rents, which when they are once
fallen, every one knows are not easily raised again, let him
consider." 2

Locke's theory was soon accepted by a number of writers.
One of the earliest was the renowned financier Davenant.
But while Davenant accepts Locke's theory of incidence, he
does not draw the conclusion that it is advisable to levy a .
single tax on land. For instance, he intimates in one place
that it may be wise to supplement the land tax by a " tax on
money." 3 He is also quite a partisan of the excise, and asks
" Can any tax be more reasonable ? " He thinks, however,
that " the proper commodities to lay excises upon are those
which serve merely to luxury, because that way the poor
would be least affected." 4 Even here, however, he believes

1 Some Considerations, pp. 92, 93.

2 Ibid., p. 95, 96. This is the first instance in English literature of any allusion
to the term " direct taxes."

8 See above, p. 67.

4 An Essay upon Ways and Means of supplying the War. [By Charles
Pavenant] London, 1695. In l ^ e Collected Works of Davenant, edited by
Whitworth, London, 1771, vol. i, pp. 65, 66.

74 Shifting and Incidence of Taxation

that excises also fall ultimately on land, even if with some-
what less crushing force than a direct land tax. 1 Dave-
nant, in fact, holds that the farther off taxes are laid
from the producer, the smaller will be their tendency
to rest on the land. 2 But this tendency, he admits,
cannot be entirely arrested ; and he does not shrink
from stating that "all taxes whatsoever are in their last
resort a charge upon land." 3 So also Asgill 4 and Cantil-

1 "Though excises will affect land in no degree like taxes that charge it
directly, yet excises will always lie so heavily upon the landed man, as to make
them concerned in parliament, to continue such duties no longer than the neces-
sity of the war continues." An Essay upon Ways and Means, p. 77.

2 "All excises should be laid as remotely from land as possible; it is true they
yield less when so put, because the first maker is best come at; but when the last
manufacturer or vender is charged, they lie with most equality upon the whole
body of the people, and come not upon land in so direct a manner." Discourses
on the Publick Revenues and of the Trade of England. London, 1698. In
Collected Works, i, p. 224.

In a later work, Davenant neglects this aspect of the excises, and emphasizes
their injurious results to trade. "There is scarce any of these new Revenues,
which do not give Trade some desperate Wound. The Additional Duties on
Beer and Ale, and the Tax upon Malt are apparently a Burthen upon the Woollen
Manufactures, affecting the Carder, Spinner, Weaver and the Dyer, who all of
them must be rais'd in their Wages, when the Necessaries of Life are rais'd to
them. The Consequences of which will be, That our Woollen Goods must come
at a heavy and disadvantagious Price into the Foreign Markets." An Essay
upon the Probable Means of making a People Gainers in the Ballance of Trade.
By the author of the Essay upon Ways and Means. London, 1699, p. 145.
(Also in Collected Works.} Cf. pp. 146, 147, where he discusses the bad influence
of the salt tax on " Manufactures and Navigation." Cf. also a passage much
quoted at the time of Walpole's Excise scheme : " This may be generally said,
That all Duties whatsoever, upon the Consumption of a large Produce, fall with
the greatest Weight upon the Common Sort; so that such as think in new Duties
that they chiefly tax the Rich, will find themselves quite mistaken; for either their
Fund must yield little, or it must arise from the whole Body of the People, of
which the richer Sort are but a small Proportion." This passage is quoted on the
title-page of The Nature of the Present Excise. London, 1733, mentioned below,
p. 81.

8 An Essay upon Ways and Means. In Collected Works, i, p. 77.

4 Several Assertions Proved in order to Create another Species of Money than
Gold or Silver. By John Asgill. London, 1696, esp. p. 20. " Man deals in
nothing but Earth; the Merchants are the Factors of the world to exchange one
parte of the earth for another. The King himself is fed by the labour of the ox
and the Cloathing of the army and the Victualing of the navy, must all be paid

Those who favor a Single Tax on Land 75

Ion 1 were worthy precursors of the Physiocrats, so far as
they asserted that land was the real foundation of all wealth,
and therefore ultimately bore the weight of all taxes.

In the early decades of the eighteenth century, Locke's
theory is frequently encountered. Some authors, like Wood,
were quite content simply to quote his views. 2 Others sought
to add to Locke's argument. One writer, who accepts the
general theory, boldly takes issue with the doctrine as ex-
pounded by Davenant, and maintains that the more indirect
the tax, the worse it will be for the landowner. 3 Another
writer, whose pages are filled with quotations from Locke, does
not deny that excises add to the price paid by the consumer,
but thinks that the producer also pays the tax, at all events
in part. 4 He seeks to prove this by an inductive study of

for to the owner of the soil as the ultimate Receiver, and whatever the ultimate
Receiver will demand or accept must be a rule for the intermediate Receivers to
govern themselves by." Asgill was first quoted by Lauderdale in An Inquiry into
the Nature and Origin of Public Wealth. London, 1804, p. 113.

1 Cantillon, Essai sur la Nature du Commerce en General^ 1755. (Transla-
tion of the English work written before 1734 but not published.) See esp. chap,
xii : " Tous les Ordres et tous les Hommes d'un Etat subsistent ou s'enrichissent
aux depens des Proprietaires des Terres."

2 A Letter to a Member of Parliament : shewing the Justice of a more equal and
impartial Assessment on Land : the Sacredness of Publick Engagements : the Ad-
vantages of lowering the Customs and high Duties on Trade : And the Ease of
reducing by Degrees the Debts of the Nation. London, 1717, esp. pp. 7 and 28.
If this pamphlet was not written by William Wood, he must be accused of plagi-
arism. For in a large work of the next year, which Wood wrote, we find whole
pages on the subject of taxation, including extracts from Locke, copied word for
word from the pamphlet, without mentioning it at all. Cf. A Survey of Trade
in Four Parts . . . together with Considerations on our Money and Bullion. [By
William Wood.] London, 1718, pp. 68-72, where pp. 5-8 of the pamphlet are
copied bodily. Wood, however, does not go quite as far as to advocate the single
tax on land. He simply objects to taking off any taxes on land.

3 " If Land Owners can and do prevent the Load of a Tax from falling directly
and immediately on themselves, yet in the last Resort there it will fall, let them
shift it seemingly as far off as they will in the first Imposition ; and perhaps just
so much farther off from them as it is laid in the first Instant, and according to
common View and Estimation, just so much the more heavily it comes upon them
at the last." An Essay on Leases and Annuities. London, n.d. [circa 1730],
p. 109.

4 " There is no Doubt but the last Retaler of excisable Goods makes an Addi-

76 Shifting and Incidence of Taxation

the malt tax. The same result, he thinks, is clear from a
scrutiny of the " duty on lights," which was intended as a
tax on the tenant, and yet turned out to be a tax on the
owner. 1 "In this Instance," says our author, "we see how
readily and quickly the Tax centers in the Landlord ; from
whence one would suspect that this is the Case in most of the
excisable Goods." 2 "The many windings and turnings in
Trade," he concludes, "may make it longer e'er the Tax
reaches the Landholder, and may prevent our discovering how
it takes its Course, yet there it must and does come at last." 3

At the time of Walpole's excise scheme, it was but natural
that this view should again be emphasized. One of the dis-
putants sought to crush his adversary by stating that "it
hath been fully proved by unanswerable Authority that all
Taxes, in this Kingdom, must ultimately affect Land." 4 But
after Locke, the theory was most fully explained at about
the same time, although independently of the excise contro-
versy, by Vanderlint, with whose views on the subject of the
workingman we have already become acquainted. 5

Vanderlint contends that if all the existing taxes were
suddenly to be abolished and to be replaced by a tax on real
estate, the benefit would still inure to the landowner. His

tion to the Price of them, equal to the Tax laid upon them; and yet I am
afraid that the first Producer pays it likewise, so that in the Event 'tis twice
paid." Some Thoughts on the Interest of Money in General, and particularly
in the Publick Funds, With Reasons for Fixing the same at a lower Rate, in both
Instances, with Regard especially to Landholders. London, n.d., p. 93. This
work, as appears from internal evidence, was published between 1728 and 1739.
The quotations are made from the second edition.

1 "The Custom in some Places, I may say in some Countries, is to throw it on
the Owners, and they discount it as regularly as they do the Land Tax." Ibid. t
p. 94.

2 " Since the Pretext of the Duty," he adds, " is so good a Handle to beat
down the Price of them in the Hands of the first Producer." Ibid., p. 95.

3 Ibid., p. 95.

4 A Review of the Excise-Scheme ; in Answer to a Pamphlet, intitled The Rise
and Fall of the late projected Excise, impartially considered. [By Pulteney?]
London, 1733, p. 22.

5 Money answers all Things, etc. By Jacob Vanderlint. London, 1734.
For the full title, see above, p. 42.

Those who favor a Single Tax on Land 77

argument is as follows: prices of commodities, when freed
from taxation, either will remain the same or will fall. If
they remain the same, assuming also that there has been
no change in the money supply, the cost of production
will decrease, because of the abolition of the tax on the pro-
ducers. The difference between cost and price, however, is
rent. Hence, the only result will be to increase the rent
of the landowner. 1 On the other hand, if the prices fall,
demand will increase. But, since all commodities, in last
resort, come from the land, this increased demand means
higher rent. 2 Thus, from either point of view, remission of
taxes redounds to the welfare of the landlord. In other words,
the incidence of all taxes is on the land. Vanderlint accord-
ingly proposed a single tax on land, as at once far cheaper
and far better than the existing complicated and inconven-
ient taxes, which after all, in his opinion, finally fall on land.
This view of the incidence of taxation occasionally appeared
in subsequent decades. Thus, during the forties, 3 one writer
seeks to prove at some length that not only do "Taxes laid
upon our Home consumption center chiefly in the Land-
owner," but "the same must be true of the, any other way,

1 "Suppose the Cash, amongst the People in general, to be what it now is;
and that all the Taxes were taken off Goods; it's evident, this would not, in the
End, lower the Price of Goods to the Consumers; since that Price . . . depends
on the Quantity of Money circulating amongst the People: But if the Duties
were taken off Goods, they must cost as much less than they do now, as the Taxes
now on them . . . now enhance them; therefore, I think, if the Taxes were taken
off Goods and laid on Lands and Houses only, so much more Money must in this
Case come to the Hands of the Farmers for the Produce of the Ground, as would
enable them to pay as much larger Rents." Ibid,, pp. 112, 113.

2 " If the Taxes were taken off Goods, they would come Cheaper, and Cheap-
ness would increase the Consumption, as Cheapness of everything always doth;
and that Increase of the Consumption would increase the Demand for those
Things. Now since everything is the Produce of the Ground, the Demand for the
Produce would increase the Demand for Land, and that would necessarily raise
the Rent, even till all the Money now paid for Taxes, together with all the Charge
they are necessarily attended with, would come into the Landlords Pockets for
Rent." Ibid., p. 114.

8 The State of our Wool and Woollen Trade Reviewed. Wherein some Objec-
tions to the Grazier's Advocate are considered, etc. London, 1743, p. 47.

78 Shifting and Incidence of Taxation

advanced Price of the Necessaries of Life." Another writer
of the same date states : "It is now no longer a Question ; all
men are convinced, and see clearly, that all Taxes ... do
either immediately, mediately, or ultimately, fall upon the
Land-Holder." l The doctrine was, however, presented to the
English public for the last time, although in an alleged
translation from the French, as late as the decade imme-
diately preceding Adam Smith, in the following statement :
" Since the time of that great metaphysical legislator, Locke,
it is an acknowledged and adopted principle of all who
reflect with any perspicuity, that the weight of every tax
upon consumption, ultimately falls and sets heavy on the
proprietors of the soil." 2

1 The Axe (once more) laid to the Root of the Tree, etc. London, 1743, p. 6.
For the full title, as well as for some other views of the author, see above, p. 53.

2 A General View of England ; Respecting its Policy, Trade, Commerce, Taxes,
Debts, Produce of Land, Colonies, Manners, etc., etc. Argumentatively stated
from the Year 1600, to 1762; In a Letter to A. M. L. C. D. By M. V. D. M.
Now translated from the French, first printed in 1762. London, 1766, p. 17.

Cf. p. 200.

CHAPTER VI

THOSE WHO FAVOR A MORE ECLECTIC SYSTEM

FOR some time after Locke's theory of the single tax on
land had been propounded, there was but little opposition
either to the scheme or to the theory of incidence on which
it was based. This was no doubt owing to the fact that the
plan was never seriously considered by the political leaders.
But when Walpole put forward his excise scheme, the prob-
lem of incidence became a burning question. Several writ-
ers not only denied the general theory of the shifting of all
taxes to land, but maintained that the land tax itself did not
rest on the land.

Walpole himself is supposed to have been the author of a
tract in which the theory is advanced that a tax on land is
shifted to the consumer. "The Land-tax," he says, "falls
heavily upon the People, by heightning the Rents of Lands,
and consequently of Bread and Drink, and other Food: So
that what the Land pays, the People too pay." l Another
writer who favors the excise thinks that " where the Land is
not Taxed, doubtless the Charge of Pasturage, and the Price
of Provisions, will be less in proportion." 2 He considers the
reduction of the land tax desirable for other reasons also,
because "even the Labourer will find it for his Benefit;
since, according to that Money which the Landed Man can
spare, the Labourer will be employed." 3

1 Some General Considerations concerning the Alteration and Improvement of
Publick Revenues. [By Sir Robert Walpole.] London, 1 733, p. 9.

2 A Letter to a Freeholder on the Late Reduction of the Land Tax to One Shil-
ling in the Pound. By a Member of the House of Commons. London, 1732, p. 21.

8 Ibid., p. 39. The author favors a tax on salt for the following remarkable
reason : " All Men use Salt in proportion to their Ability, but all Men do not hold

79

8o Shifting and Incidence of Taxation

The fullest expression of this view is found in the work of
an anonymous pamphleteer who addressed himself primarily
to the question of incidence. 1 He opposes the taxation of
land, and incidentally favors the excise scheme, because the
land tax is, in his opinion, shifted to the consumer. The
smaller the land tax, the lower will be the price of provisions.
This means lower money wages for the workman, and this,
again, will enable the employer to compete with foreigners. 2

In another passage, the author states outright that "a
Land-Tax, which affects all the common Necessaries of Life
of our own Production, is an actual general Excise, in the
strict Sense of the Words." He therefore favors a scheme
like Walpole's, because " it is a particular Excise upon foreign
Superfluities and Luxuries, with a View to take off a general
Excise from the common Necessaries." 3 Later on, again,
the author tries to show in considerable detail how a tax on
land will raise the price of all manufactured products, as well
as of the produce of the soil. He concludes that " whatever
Tax be laid upon Land, the Rents and Produce thereof will

Land : to Multitudes of the former, there are very few of the latter ... Is it not
then much more equal and righteous that we should tax every Man a little in pro-
portion to his Ability, than that we should tax a very few Men in a great Degree,
far beyond the Proportion of their Ability ? " A Letter to a Freeholder, pp. 28,
29. A somewhat similar defence of the salt duty is found in another tract entitled
A Vindication of the Conduct of the Ministry, in the Scheme of the Excise on Wine
and Tobacco, etc., etc. London, 1734. The author favors the salt tax: "first
that Duty is payed universally over the whole Nation and that it costs but little to
every one in particular." Ibid., p. 57.

1 Englishmen's Eyes opened ; or All made to SEE, who are not resolved to be
BLIND: Being the Excise Controversy set in a new Light ; completely discussed
upon the just Principles of Reasoning, and brought to a fair and demonstrative
Conclusion : between a Landholder and a Merchant. London, 1733.

2 " By easing the Land, the Price of all the common Necessaries and Con-
veniencies of Life become cheaper ; . . . when a Land-Tax is taken off, Land-
lords may afford to ease their Tenants, and they of course will ease the Poor in the
Price of the Production of their Lands. The Poor, when they can live cheaper,
will work cheaper; and our Manufactures will consequently be exported cheaper."
Ibid., p. 7.

8 " Far from having a Tendency," he continues, " to what the Judicious under-
stand by a general Excise, no Step could possibly be taken more effectually to free
us from a general Excise." Ibid., p. 15.

Those who favor a More Eclectic System 8 1

be in a continual Flux of Raising, till the Landlord finds his
Gains to be as great after the Deduction of that Tax, as
before it was imposed." * He discusses at some length the
argument of " Mr. Lock," but thinks that " gentlemen have
wrested the Sense of this great Author, and made him speak
their Sentiments, not his own." 2

These writers, as we have seen, opposed the land tax,
because, among other defects, it was shifted to the consumer.
But others who held the same doctrine of incidence drew
precisely the opposite conclusion, favoring the land tax and
trying to make it popular with the farmers and with the land-
owning legislators, just because it would not fall on them.
Thus the author of an interesting tract 3 thought that the
landlords raised their rents by the amount of the land tax,
but that the farmers did not suffer, because they simply
added the tax to the price of their products, the weight of
the tax thus resting at last on the consumer. 4

The theory that the land tax is shifted to the consumer was,
as we know, a favorite doctrine of Petty. 5 It ran counter,
however, not only to the popular understanding, but to the
ideas of most of the writers that discussed the land tax, who
opposed or favored it according to their views as to the desir-
ability of taxing the landowner. Thus, in the seventeenth

1 Ibid., p. 54.

2 By a very involved and curious process he comes to the conclusion that the
" Reasoning of Mr. Lock, although he has been frequently cited as an Authority
for laying the Burthen of the Revenue upon Land, exactly quadrates with the
whole Chain of my Argument in Opposition to it." Ibid., p. 57.

3 The Nature of the Present Excise, and the Consequences of its farther Exten-
sion, examined. In a Letter to a Member of Parliament. London, 1733. The
author is noteworthy as being one of the first to propound the capitalization
theory of the land tax. See below, pp. 137, 138.

4 " All the Gentlemen . . . have had frequent opportunities of re-setting their
Lands, and have indemnified themselves by raising their Rents : What they have
lost by the Tax, they have gain'd in their Rent-rolls. The Farmers themselves
have not felt it much, because they have raised the Price of Provisions likewise in
Proportion, as their Landlords have raised their Payments; so that the greatest
Burthen has lain all along upon the Consumer, who in Nine Instances out of Ten,
is a Labourer or Manufacturer." Ibid., p. 38.

6 See above, p. 19.
G

82 Shifting and Incidence of Taxation

century, one pamphleteer strongly upheld the land tax, 1
while Reynell as vigorously objected to it, 2 but neither
imagined for a moment that the tax would not rest where
it was imposed.

Again, at the time of the excise scheme most of those who
favored the excise did so because they desired to relieve land
from the burdens resting on it. As one of the writers put
it : "A Tax imposed upon Land, is utterly unavoidable. Let
a Freeholder be in narrow circumstances, let him have a large
Family, let him be a frugal Man, or let his Case be what he
will, he cannot help himself by any Abatement of this Charge
upon his Income. Such an Estate is loaded with such a Bur-
den, which no Management can lighten." 3

With the greater diversity of taxation in the eighteenth
century, the controversies over the incidence of taxation soon
covered more ground than the land tax. With this widening

1 " It is humbly offered and submitted, whether there can be any way in the
World found, more certain, equal, and easie, to raise the same (Money), than by
a Land-Tax : for then they will know what it is they give, when and how cer-
tainly it will come in, and the time when the same will end." The Grand Con-
cern of England ; explained in several Proposals offered to the Consideration of
the Parliament. By a Lover of his Countrey and Well-wisher to the Prosperity
both of the King and Kingdoms. London, 1673, p. 3.

2 " Taxes were better raised any way than from the Land, for that drains Money
out of the Country which seldom or never returns . . . There might be waies
found out, that no Taxes might ever be laid, on the substantial part of the Nation,
Country, or City, Land, or Houses. " The True English Interest, or an Account
of the Chief Natural Improvements. By Carew Reynell. London, 1674, chap.
25 : " Kings Revenue, Taxes, Customs," pp. 68, 69. His scheme was to lay a tax
" only on the vices of the People, as on all Taverns, Ale Houses, Foreign Needless
Commodities and on debauched persons." To this he added a tax on bachelors,
and high customs duties which he thought would be paid by the foreigner.

8 A Letter to the Free-holders of Great Britain. London, 1 733, p. 27. " But
Wine and Tobacco," he adds, " are things of quite another Kind ... A Man
may either live comfortably without them, or lessen his Expences in them, as he
sees convenient." Cf. for similar views as to the land tax A Letter from a Mem-
ber of Parliament for a Borottgh in the West, to a Noble Lord in his Neighbour-
hood there, concerning the Excise-Bill and the Manner and Causes of Losing it.
London, 1733, p. 27. See also The Rise and Fall of the late Projected Excise,
impartially considered. By a Friend to the English Constitution. London, 1733,
pp. 13, 15, 27.

Those who favor a More Eclectic System 83

of the field, the opposition to Locke's theory of the single tax
grew apace. Nugent, for example, the author of a widely
read monograph, maintains that " Mr. Locke's position, taken
in its full extent and without any limitations, is greatly contro-
vertible," and "that the maxim seems to go farther than
reason and experience will warrant." 1 He does not object to
the statement that a tax laid upon farmers' produce " makes
people less forward to buy" ; but he does not see "why that
reason should not have the same operation upon other com-
modities." The demand for commodities, he thinks, depends
" on the quantity of money subsisting in the market " ; and
if this quantity is unchanged, an increased tax on the general
trader must diminish mercantile profits. 2 The same argu-
ment which proves that a land tax cannot be shifted equally
shows that a tax on traders' profits can likewise not be shifted.
Nugent, however, makes one notable exception, maintaining
that it is useless to try to tax "moneyed men" on their
personal property. For, says he, taxes on mortgages or on
the public funds would be shifted to the mortgagor or to
the public, respectively, through a corresponding increase
in the rate of interest. 3 Finally, he objects to any further
increase of the excise taxes, opposing the view that higher
taxes will induce the poor to work. 4 Therefore, while he
is confessedly not an advocate of any single tax on land, he
objects to a lowering of the land tax, which would involve
a further increase in the taxes on trade and commodities.

1 Considerations upon a Reduction of the Land Tax. [By Robert Nugent.]
London, 1749, p. 9.

2 " And if additional taxes be laid, while the money, with which commodities
are to be purchased, remains unincreased, the traders must be contented with
smaller gains, or not trade at all. And the first part of the alternative will always
be the case, where the profits of a nourishing trade may well support some diminu-
tion." Ibid., p. 14.

3 " Were mortgages, or the funds, to be taxed, matters would not be mended.
For, as taxes, wherever placed, can have no tendency to lower the interest of
money; they, who buy into the funds, would buy so much cheaper as the tax
would amount to, and the lender upon mortgages insist upon a higher rate of
interest." Ibid., p. 25.

4 See above, p. 42.

84 Shifting and Incidence of Taxation

In a later monograph Nugent returns to the charge and
speaks of the absurdity of those who " contend for an Abate-
ment of that Tax, preferable to all others, the cheapest levied,
producing most, and the least felt, of any. And such, incon-
testably, is the Land-tax; which, bating the Word, affects
that Interest, which opposes it strongest, less, than any other
Tax in like Proportion of Quantity and neat Produce." l

The general doubt as to the truth of Locke's theory is
seen in a number of other works. Thus an anonymous writer
of about the same period maintains that the existing taxes
affect not only the landowner, but also the laborer and the
trader. 2 In former times, he says, "when taxes were very
moderate, because they were so, the necessaries of Life were
cheap ; Labour was so. The consequence of which was, that
we were enabled to work up our Manufactures so moderately
cheap as to command most of the Markets of the World." 3
A little later Postlethwayt refers to the opposition to Locke's
theory, without attempting, however, to give his reasons. 4
Another writer refers more specifically to Locke's doctrine
that taxes on commodities are indirect taxes on land. 5 This
he thinks a mistake, not only because wages do not rise pro-
portionately with taxes on labor, but also because trade is
able to shift the burden of taxes to the consumer. It is

1 Further Considerations upon a Reduction of the Land- Tax : Together ivith a
State of the Annual Supplies of the Sinking Fund, and of the National Debt, at
various future Periods, and in "various Suppositions. [By Robert Nugent.] Lon-
don, 1751, pp. 90, 91.

2 Britannia in Mourning: or a Review of the Politicks and conduct of the
Court of Great Britain with Regard to France, the Ballance of Power, and the
True Interest of these Nations . . . and likewise a View of the present State of
our Liberties and Trade, compared with what they have been, etc. In a Dialogue
between two ancient Patriot Englishmen, commonly known by the names of, Jest
and Earnest. London, 1742.

3 Ibid., pp. 13, 14.

4 " If Mr. Locke's Observation, that all Taxes in general ultimately terminat-
ing upon landed (sic} should be exceptionable, as some think it, yet," etc.
Great Britain's True System, etc. By Malachy Postlethwayt. London, 1757,
p. 306.

5 Considerations on the Policy, Commerce and Circumstances of the Kingdom.
London, 1771, chap, viii: "On Taxes," p. 60.

Those who favor a More Eclectic System 85

the workman, not the landowner, upon whom the weight
finally rests. 1

The most famous opponents of the single tax on land,
however, were the two chief economists of the third quarter
of the eighteenth century, Hume and Steuart. Hume attacks
Locke's doctrine on the ground that every one tries to shift
the tax to some one else ; and that there is no reason to sup-
pose that the landowners are weaker in this respect than
other classes of society. " Every man, to be sure," says
Hume, " is desirous of pushing off from himself the burthen
of any tax, which is impos'd, and laying it upon others : But
as every man has the same inclination, and is upon the de-
fensive ; no set of men can be supposed to prevail altogether
in this contest. And why the landed gentlemen shou'd be
the victim of the whole, and shou'd not be able to defend
himself, as well as others are, I cannot readily imagine." 2
Hume thinks that the principle " tho' first advanc'd by a cele-
brated writer, has so little appearance of reason, that were it
not for his authority, it had never been receiv'd by anybody."

In another celebrated passage, Hume discusses the maxim
of the " ways and means men," which he accepts in part
" that every new tax creates a new ability in the subject to
bear it." He points out that the consequences of laying a tax

1 " Mr. Locke was of opinion, that taxes upon commodities affect the landed
interest more than if laid directly upon land; which would be a good deal the
case, if the prices of labour were raised proportionally to the increase of taxes;
but that has not been done in this country. There is indeed no taxing of traders
in the articles of their traffic, because they are, and ever will be, the raters of the
values of their own commodities : so that experience shews, for a small tax laid
on any thing they deal in, they will make a large consideration in price. Thus
those whose single commodity is labour; are taxed by government, directly for
their windows, for statute-work and most commodities they consume, and they are
indirectly taxed by land-owners in the increase of farm-rents, because the farmer
raises proportionally the prices of his commodities; while other dealers add to the
taxes that are laid on the commodities they sell, another to themselves in the
prices which they exact; without workmen having any advance in their own
wages that is equivalent." Ibid., pp. 60-62.

2 Political Discourses. By David Hume, Esq. Edinburgh, 1752. Chap, viii:
"Of Taxes," p. 121. The quotations are from the second edition, published in
the same year.

86 Shifting and Incidence of Taxation

on commodities consumed by the common people are ordi-
narily supposed to be a diminution of wages so that the laborer
bears the burden himself, or an increase of wages whereby
the burden is shifted to the employer. "But," he adds,
" there is a third consequence, which very often follows upon
taxes, viz. t that the poor encrease their industry, perform
more work, and live as well as before, without demanding
more for their labour." 1

Hume here seems to share the opinion already discussed, 2
that taxes act as a spur to industry. But if his reasoning be
attentively considered, it will be seen that he is not willing to
push the theory very far. For in the first place, he limits
the doctrine to taxes other than those imposed upon neces-
saries of life; and, secondly, even as to these he is doubtful.
" This doctrine," he tells us, " may be admitted in some de-
gree: But beware of the abuse. Exorbitant taxes, like
extreme necessity, destroy industry, by engendring despair;
and even before* they reach this pitch, they raise the wages
of the labourer and manufacturer and heighten the price of
all commodities. An attentive, disinterested legislature will
observe the point, where the emolument ceases, and the
prejudice begins." 3

The fullest discussion of the incidence of taxation before

1 " Where taxes are moderate," he goes on to say, " and affect not the necessa-
ries of life, this consequence naturally follows ; and 'tis certain that such diffi-
culties often serve to excite the industry of a people, and render them more
opulent and laborious than others, who enjoy the greatest advantages." Politi-
cal Discourses, p. 115.

2 Above, pp. 32-39.

8 Ibid., p. 118. Bastable, Public Finance, book iii, chap, ii, 3 (2d ed., p.
270), scarcely does Hume justice in seeming to ascribe to him the doctrine in its
extreme form. Somewhat analogous to the doctrine that taxes on production are
a spur to industry, is the theory that taxes on consumption increase the quantity of
commodities consumed. We find this theory, not indeed in its extreme state-
ment, but in a modified form, formulated by Arthur Young as follows : " Render
any thing by taxes something more of a distinction than formerly, and you will
find that the tax, instead of checking, will increase the consumption." Political
Arithmetic, 1774, p. 217. The same observation is found in the anonymous
pamphlet Inquiry into the Connection between the Size of Farms and the present
Price of Pro-visions. London, 1773.

Those who favor a More Eclectic System 87

Adam Smith is to be found in the works of Sir James Steuart. 1
He divides all taxes into three kinds, proportional, cumu-
lative and personal. Proportional taxes are those that fall
upon expense (what we should call indirect taxes) ; cumulative
or arbitrary taxes are those that affect property; and per-
sonal taxes are those that consist of personal services. 2 Pro-
portional taxes, he says, are always " drawn back " (that is,
shifted) by the industrious consumer. Steuart thinks a con-
sumer "industrious" in all cases, except when the "consump-
tion made by the latter is an article of superfluity." In other
words, taxes on the necessaries of life are shifted from wage-
earner to employer because the wage-earner is a "physical
necessarian " who accumulates no profits ; 3 but if the laborer
spends his money on taxable articles which other members of
his class do not use, he cannot shift the tax.

Steuart illustrates this point as follows : " A tanner sells
his leather to a shoemaker; the shoemaker, in paying the
tanner for his leather, pays the tanner's subsistence and profit,
and the tax upon leather. The man who buys the shoes for
his own consumption, refunds all this to the shoemaker,
together with his subsistence, profit, and the tax upon shoes ;
consequently, the price of shoes are (sic) raised, only by refund-
ing the taxes paid by the industrious. But if the shoemaker's
subsistence shall happen to include either tavern expences,
or his consumption on idle days, he will not draw these back ;
because other shoemakers who do not frequent the tavern,
and who are not idle, will undersell him." All proportional

1 An Inquiry into the Principles of Political (Economy : being an Essay on
the Science of Domestic Policy in Free Nations. By Sir James Steuart, Bart.
London, 1767, book v, chaps, iii-vi, "Of Taxes, and of the proper application of
their amount." In the edition of his Collected Works, published in six volumes
in 1805, the subject is contained in vol. iv. The quotations here are from the
original quarto edition, vol. ii.

2 " A proportional tax is that which is levied upon the idle consumer, at the
time he buys the commodity." "A cumulative tax, is the accumulation of that
return which every individual, who enjoys any superfluity, owes daily to the state,
for the advantages he receives by living in the society." Ibid., ii, p. 500.

3 Ibid., ii, p. 491.

88 Shifting and Incidence of Taxation

taxes, therefore, fall at last upon "the rich and idle con-
sumer of the manufacture, who can draw nothing back from
anybody. . . . The whole reimbursement of all former pay-
ments and repayments lands upon him." Hence Steuart
concludes, " How absurd therefore, is it either to say that all
taxes fall ultimately upon land ; or as others, for no better
reason, pretend, that they fall upon trade." " Proportional
taxes never can fall either upon, or affect any person but the
idle; that is to say the not industrious consumer." 1

With regard to what he calls cumulative taxes, Steuart
lays down the general rule that "the nature of all these taxes,
is, to affect the possessions, income and profits of every indi-
vidual, without putting it in their power to draw them back
in any way whatever; consequently, such taxes tend very
little towards enhancing the price of commodities." 2 These
taxes ought, therefore, in his opinion, generally to be dis-
countenanced. Taxes on land, he thinks, do not augment
the price of wheat as similar taxes on commodities raise the
price of excisable goods ; for, if the proprietor were to at-
tempt to raise the price of his grain in proportion to the tax,
his farmer who pays no land tax would undersell him. 3 All
attempts to levy a tax on money, however, he regards as
certain to fail. A tax on trade profits, again, although it
tends to rest on profits, is not to be recommended, because,
" although they appear to be income, I rather consider them
as stock, which ought not to be taxed." 4 Steuart' s final con-
clusion is expressed in these words: "I conclude that no
objection can lie against proportional taxes, so far as they
affect the industrious; because they draw them compleatly
back: and that great objections lie against cumulative taxes,
when they affect the industrious, because they cannot draw
them back ; and consequently, they may affect the physical-
necessary of the contributor, in case no profit should remain
to him upon his labour. On the other hand, I think little
objection can be made to cumulative taxes, when they are

1 An Inquiry into the Principles, etc., ii, p. 494. Cf. ii, p. 510.

2 Ibid., ii, p. 496. 8 Ibid., ii, p. 552. 4 Ibid., ii, p. 541.

Those who favor a More Eclectic System 89

imposed upon possessions, which produce a visible annual
revenue, clear to the proprietors." 1

It is clear, therefore, that by the third quarter of the
eighteenth century the economists, although differing among
themselves, were united in opposing Locke's theory of the
shifting of all taxes to land. It is no wonder that Dugald
Stewart wrote, a few decades later, in reference to the plan
of the single tax on land : " I shall only remark, that the first
idea of it was borrowed from this country, where it has been
repeatedly suggested by authors of reputation, although it
had been almost forgotten as an exploded chimera, when
it was revived by the Economists of France." 2 And Arthur
Young wrote : " I know not whether Mr. Locke were the
original father of the doctrine, that all taxes, laid in any man-
ner whatsoever, fall ultimately on land ; but whoever started
or supported it, contributed towards the establishment of one
of the most dangerous absurdities that ever disgraced com-
mon sense." 3

We have now completed our examination of the early liter-
ature on taxation. We have limited ourselves to England
for two reasons : first, because most of the fiscal writings, as
well as those on economics in general, are to be found in
England; and, secondly, because the scantier literature of
the continent is very much better known. The continental
literature, however, so far as it discussed the incidence of
taxation at all, confined itself chiefly to generalities on the
question of direct versus indirect taxation, and more specifi-

1 Ibid., ii, p. 519.

2 Lectures on Political Economy [delivered in 1800-1801]. Now first pub-
lished. By Dugald Stewart. Edited by Sir William Hamilton. Edinburgh,
1877, ii, p. 238.

3 Travels in France. By Arthur Young. London, 1794, i, p. 590. Young
adds, in reference to the idea of the single tax : "Taxes should bear lightly on
an infinite number of points, heavily on none. In other words, simplicity in taxa-
tion is the greatest additional weight that can be given to taxes and ought, in
every country, to be most sedulously avoided." i, p. 596. In an earlier work,
Political Arithmetic, 1774, Young discusses Locke's theories at some length.
Cf. pp. 211 et seq.

QO Shifting and Incidence of Taxation

cally to the effects of the excise. In France the two attempts
to develop a theory of fiscal reform that were made by
Boisguillebert and Vauban 1 met with such little favor in court
circles that a quietus was put on the discussion of the topic
for more than half a century. In Germany the only treat-
ment of the subject, apart from the monotonous productions
of the " Cameralistic " writers, is found in the controversial-
ists on the scheme for the general excise at the close of the
seventeenth and the beginning of the eighteenth centuries. 2
In Italy the number of authors was perhaps more numerous,
but their influence was small. 3

In our survey of the English literature, we have found
almost as many views as there were writers. That taxes
remain where they are imposed, that all taxes are shifted to
the landowner, that they are shifted to the trader, that they
rest on the laborer, that they rest on the rich consumer, that
they do not rest on the consumer at all these, and varia-
tions of these, doctrines meet us in bewildering confusion.
Yet even here certain currents of thought may be discerned,
and the attempt has been made in the preceding pages to
point out the general direction of these currents. The great
weakness in all the discussions, however, was the lack of any
consistent economic theory in general, and of a theory of
distribution in particular. Without such a general definite
theory as a basis, the whole superstructure of the doctrine of
incidence was necessarily both slight and unstable. It was

1 Boisguillebert wrote the Detail de la France, 1697, and Factum de la France,
1707. Vauban wrote the Projet d'une Dime Roy ale, 1707. Vauban's work was
translated into English under the title An Essay for a General Tax ; or a Project
for a Royal Tythe. By the famous Monsieur Vauban, Marshal of France, etc.
London, 1709. The translation was widely read and went through several
editions.

2 For these writers see "Der Accisestreit deutscher Finanztheoretiker im 17.
und 1 8. Jahrhundert." Von Karl Th. von Inama-Sternegg. In the Tiibinger
Zeitschrift fiir die gesammte Staatswissenschaft, vol. xxi (1865), pp. 514-546.
Cf. also Geschichte der National-okonomik in Deutschland. Von Wilhelm Roscher.
Miinchen, 1874, pp. 319-326.

8 For these, see Storia delle Dottrine Finanziarie in Italia, Dal Prof. G.
Ricca-Salerno. Roma, 1881 (2d edition, 1895).

^c :

Those who favor a More Eclectic System 91

reserved for the Physiocrats and Adam Smith to formulate
for the first time a consistent theory of distribution as the
very basis of the new political economy, and it is accordingly
with them that the modern theories of the incidence of taxa-
tion begin. It is these modern theories that will now engage
our attention.

BOOK II
THE MODERN THEORIES

CHAPTER I

THE PHYSIOCRATIC THEORY

THE Physiocratic theory of incidence was outlined by the
founder of the sect, Quesnay ; it was developed by Mirabeau ;
it was discussed from all sides by Mercier de la Riviere,
by Du Pont de Nemours, and by the Abbe* Baudeau; and
it was finally completed by various works of Turgot. The
theory may be summed up as follows: Agriculture is the
sole source of wealth. It is the only productive employment
because it alone furnishes a produit net or surplus above the
necessary expenses of production. These necessary ex-
penses the Physiocrats call the agricultural advances or out-
lay. They are of two kinds : first, the primitive advances
(avances primitives), consisting of the capital applied to land
in the shape of implements, beasts of burden, clearing and
preparing the soil ; and secondly, the annual advances (avances
annuelles), or the capital spent on wages and on maintaining
the primitive advances that is, in keeping the land, ani-
mals and tools in good condition. The gross product is
called by them the returns of agriculture (reprises de la cut-
ture)\ and after deducting from this gross product the
annual advances plus the interest on the primitive advances,
there remains the net produce or the surplus above the
expenses of cultivation.

Agriculture alone furnishes such a surplus. All other
occupations are utterly unproductive or "sterile." Industry
and commerce may be useful and even necessary to a com-
munity ; but they are economically unproductive. They do
not create new wealth, but simply transform existing wealth.
They may increase values, but the increase of value must be

95

96 Shifting and Incidence of Taxation

exactly equivalent to the labor expended ; and the value of
this labor is in last resort dependent on the value of the food
or the other objects furnished by the agricultural class.
Since the " net product " of agriculture is therefore the sole
fund or source of wealth, all taxes, however levied, must ulti-
mately be paid from this fund. Hence it is much better to
assess this fund directly by a land tax, than to assess it indi-
rectly by any other tax. For in this way we save expense
and trouble. But whether we levy direct or so-called indirect
taxes, the incidence is always on the land.

Although there now exists in English an admirable sketch 1
of the general economic doctrines of the Physiocrats, the
absence of any detailed account of their fiscal views, as well
as the lack of any English translation of their chief works, 2
justifies a somewhat extended presentation of their doctrine
of the incidence of taxation.

The fullest and the best account of the doctrine of inci-
dence is found in the works of Quesnay. 3 This writer posits
the maxim that taxes should bear some proportion to the
mass of national income, and that they should be imposed
directly on the net produce of land, not on wages or com-
modities. The outlay for agriculture should be regarded as
something precious, to be preserved as a fund not only for
the payment of taxes, but for the creation of the social in-
come and for the subsistence of the citizens. Otherwise,
taxation becomes mere spoliation. 4

1 Higgs, The Physiocrats. London, 1897.

2 The only English translation is that of Turgot, Reflections on the Formation
and Distribution of Wealth, London, 1793; and again, with a slightly different
title, in Professor Ashley's Series of Economic Classics, New York, 1898. But this
deals only to a slight extent with problems of taxation.

3 The best edition of Quesnay's writings is (Euvres Economiques et Philoso-
phiques de F. Quesnay, Fondateur du Sysieme Physiocratique, avec une Introduc-
tion et des Notes par Auguste Oncken. Francfort-sur-le-Main, 1888. A less
complete, but more familiar, edition is that of E. Daire, in the volume of the
Collection des principaux Economistes, entitled Physiocrates. Paris, 1846.

4 " Que l y impot ne soit pas destructif, ou disproportionne a la masse du revenu
de la nation ; que son augmentation suive V augmentation du revenu ; qu'il soit
etabli immediatement sur le produit net des biens fonds, et non sur le salaire des

The Physiocratic Theory 97

Quesnay proceeds to illustrate this doctrine as follows : A
well-regulated tax should be deemed a part of the income
separated from the net produce of the soil ; for otherwise it
would be impossible to frame any rule of proportion between
taxation and wealth or income. All the taxpayers might be
ruined before the government would notice it. The real net
produce, he continues, may be divided into three parts, be-
longing respectively to the state, to the landowner, and to
those who collect the tithe. Only the landowner's portion is
subject to sale, and its price will vary with the revenue it
yields. The landowner's property extends only to this por-
tion. He therefore does not pay the others who share in the
property, for their portions do not belong to him, have never
been acquired by him, and cannot be sold. The landowner
then must not look upon a tax as a charge imposed upon his
share. He does not pay the ordinary tax ; it is the part of
the property which does not belong to him, that pays the
tax. It is only in extraordinary exigencies, when the very
safety of the property itself is imperilled, that all the co-pro-
prietors must, for the time being, share in the burden. 1

homines, ni sur les denrees, ou il multiplierait les frais de perception, prejudicierait
au commerce et detruirait annuellement une partie des richesses de la nation.
Qu'il ne se prenne pas non plus sur les richesses des fermiers des biens-fonds;

Car LES AVANCES DE L' AGRICULTURE D'UN ROYAUME DOIVENT ETRE ENVISAGEES
COMME UN IMMEUBLE QU'lL FAUT CONSERVER FRECIEUSEMENT POUR LA PRODUC-
TION DE L'IMPOT, DU REVENU, ET DE LA SUBSISTANCE DE TOUTES LES CLASSES DES

CITOYENS: autrement 1'impot degenere en spoliation et cause un deperissement
qui ruine promptement un Etat." Maximes Generates du Gouvernement
conomique d'un Royaume Agricolc. 1758, no. v. In Daire's Physiocrates,
p. 83; in Oncken's CEuvres de Quesnay, p. 332.

1 " L'impot bien ordonne . . . doit Stre regarde comme partie du revenu
detachee du produit net des bien-fonds ... Le produit net des biens-fonds se
distribue a trois proprietaires, a 1'Etat, aux possesseurs des terres et aux deci-
mateurs. II n'y a que la portion du possesseur du bien qui soit alienable, et elle
ne se vend qu'a raison du revenu qu'elle produit. La propriete du possesseur ne
s'etend done pas au-dela. Ce n'est done pas lui qui paye les autres proprietaires
qui ont part au bien, puisque leurs parts ne lui appartiennent pas, qu'il ne les a pas
acquises, et qu'elles ne sont pas alienables. Le possesseur du bien ne doit done
pas regarder 1'impot ordinaire comme une charge etablie sur sa portion; car ce
n'est pas lui qui paye ce revenu, c'est la partie du bien qu'il n'a pas acquise, et
qui ne lui appartient pas, qui le paye a qui il est du. Et ce n'est que dans les cas
H

98 Shifting and Incidence of Taxation

It should not be forgotten, Quesnay warns us, that taxes
ought to be imposed on real income that is, on the annual
net produce of lands and not on the wages of the farm
laborer, or on the wages of the industrial laborer, or on com-
modities. If levied on agricultural wages, a tax would im-
pede production, injure the land, and ruin the farmers, the
landowners and the government. If levied on the wages of
industrial laborers or on commodities, a tax would be arbi-
trary, the cost of collection would exceed the yield of the
tax, and the burden would fall without any uniformity on the
income of the sovereign and of the people. We must be
careful, he continues, to distinguish between a tax or impost
on the one hand, and an imposition on the other. Imposi-
tions would amount to triple the imposts, and would extend
to the imposts themselves ; for the impositions or false taxes
levied on commodities would have to be paid finally by the
imposts or real taxes. 1

The so-called tax or imposition on men who live by their
labor, says Quesnay, is really a tax on labor, which is neces-
sarily paid by the employer just as a tax on the horses used
on a farm is really a tax on the expenses of cultivation.
Therefore a tax on men, instead of on revenue, would rest
on the expenses of industry and agriculture, would fall with

de necessity, dans les cas ou la surete de la propriete serait exposee, que tous les
proprietaires doivent pour leur propre interet contribuer sur leurs portions a la
subvention passagere que les besoins pressants de 1'Etat peuvent exiger." Daire,
pp. 83, 84; Oncken, pp. 337, 338.

1 " Mais il ne faut pas oublier que dans tous les cas 1'imposition du tribut ne doit
porter que sur le revenu, c'est-a-dire sur le produit net annuel des biens fonds; et
non sur les avances des laboureurs, ni sur les homines de travail, ni sur la vente des*
marchandises, car autrement il serait destructif. Sur les avances des labourers ce 1
ne serait pas un impot, mais une spoliation qui eteindrait la reproduction, dete-
riorerait les terres, ruinerait les fermiers, les proprietaires et 1'Etat. Sur le salaire
des homines de travail et sur la vente des marchandises, il serait arbitraire, les
frais de perception surpasseraient 1'impot, et retomberaient sans regie sur les
revenus de la nation et sur ceux du souverain. II faut distinguer ici 1'imposition
d'avec I'impSt ; 1'imposition serait le triple de 1'impot, et s'etendrait sur 1'impot
meme; car, dans toutes les depenses de 1'Etat, les taxes imposees sur les mar-
chandises seraient payees par I'impdt. Ainsi cet impot serait trompeur.et ruineux."
Daire, p. 54; Oncken, p. 338.

The Physiocratic Theory 99

redoubled force on the revenue of land (since all industry
rests on the land), and would rapidly lead to the destruction
of real taxation itself. The same may be said of taxes on
commodities.

A tax levied indiscriminately on land, on products, on men,
on labor, on commodities and on beasts of burden would
involve a combination of six equal taxes, superimposed the
one on the other, all resting on the same base and yet paid
separately but all together yielding less revenue than a
simple real tax, assessed without expense and solely on the
net produce. Such a tax, suggested by the order of nature,
would greatly increase the revenue of the sovereign, but
would nevertheless cost the nation and the state five-sixths
less than the taxes imposed on everything. The latter,
moreover, would annihilate the country's production and
would exclude all possibility of ultimate reform. For these
taxes, illusory for the sovereign and ruinous to the nation,
appear to the vulgar all the more inevitable as the decay of
agriculture progresses.

Quesnay concludes, therefore, that taxes should be imposed
directly on the net produce of land ; for, no matter how the
tax is imposed, it is always paid by the land. Hence the
form of taxation which is at once the simplest, the best regu-
lated, the most productive and the least burdensome, is that
which is levied proportionally to net produce and directly on
the source of the ever new-born wealth. 1

In another work, 2 Quesnay devotes himself specifically
to the problem of indirect taxation. Some indirect taxes,
he tells us, are comparatively simple and economical. Such,

1 " L'impot doit done 8tre pris immediatement sur le produit net des biens-
fonds; car, de quelque maniere qu'il soit impose dans un royaume qui tire ses
richesses de son territoire, il est toujours paye par les biens-fonds. Ainsi la forme
d'imposition la plus simple, la plus reglee, la plus profitable a 1'Etat, et la moins
onereuse aux contribuables, est celle qui est etablie proportionnellement au produit
net et immediatement a la source des richesses continuellement renaissantes."
Daire, pp. 84, 85 ; Oncken, p. 339.

2 Second Probleme conomique : determiner les Effets d'un Impot Indirect.
In Physiocratesy Daire's edition, pp. 127 et scq.; in (Euvres, Oncken's edition,
pp. 697 et seq.

ioo Shifting and Incidence of Taxation

for instance, are the general property or income tax, known
as the taille personnelle, the poll tax, the corvee or road tax,
the tax on house rent, and the tax on funds. Others are
more complex and more costly to collect. Such are the
taxes on products and merchandises, import and export
duties, internal tolls, taxes on transportation and communi-
cation, on sales, on offices and positions, on privileges and
franchises. All these taxes together form an aggregate that
may be summed up under the name of the indirect tax ; the
various expenses of collection and other surcharges, consti-
tute another mass which may be called the cost of the indi-
rect tax}-

Quesnay proceeds to call attention to the evil results of
all these indirect taxes. Following the detailed figures of
his celebrated Economic Table? he calculates the actual
losses to the community. If, for instance, instead of a
direct tax of 800 millions, only 300 millions were raised by
a land tax, and 500 millions by indirect taxes, Quesnay
figures out that the landowners would have to pay 235 mil-
lions more, that the government would lose 379 millions, and
that wages would fall by a sum of 318 millions, making a

1 " II y a des imp8ts indirects, simples et peu dispendieux dans leur perception.
Tels sont ceux qui s'etabliraient sur les hommes en forme de taille personelle, de
capitation, de corvees, de taxes sur les loyers de maisons, sur les rentes pecuniaires,
etc. D'autres sont fort composes, et entrainent une perception fort dispendieuse.
Tels sont ceux qui seraient etablis sur les denrees et marchandises, aux entrees, aux
sorties, aux peages, aux douanes, ou sur les navigations et charrois du commerce
interieur et exterieur, ou sur la circulation de 1'argent dans les achats et dans les
ventes de toute espece; telles sont aussi les creations de charges et d'offices, avec
attribution perpetuelle ou & terme de droits et taxes, au profit de ceux qui en
seraient revetus, les privileges de commerce exclusif, etc. . . . Mais la reunion de
ces divers impots indirects, plus au moins onereux, formant une masse totale que
1'on peut en general appeler Vimpot indirect, la reunion des frais de perception et
des autres surcharges que tous ces divers impots entrainent a leur suite, presente
une autre masse que 1'on peut appeler aussi en general les frais de fimpot indi-
rect, et dont la quotite, considered relativement k la somme que le souverain retire
de la totalite des impots indirects, etablit le taux moyen des frais de perception
des impots de ce genre." Daire, p. 127; Oncken, pp. 697, 698.

2 Le Tableau Economique. This was reprinted by the British Economic Asso-
ciation in 1894.

The Physiocratic Theory 101

total loss to the community of 932 millions. In addition to
this immense money loss, the other resulting evils may be
summed up under four heads. First in order comes the
rapid deterioration of the land, due partly to the decrease
in agricultural capital, partly to the fear of employing new
machines or adopting new processes which would be subject
to indirect taxes, partly to the ravages made in the substance
of the cultivators themselves. Secondly, we notice the im-
mense fortunes of the tax-collectors, which impede the cir-
culation of money and its return to agriculture. Thirdly, is
to be mentioned the residence of the rich financiers in the
capital, which tends to separate consumption from the place
of production. And, fourthly, we must not forget the mul-
tiplication of beggars, which is to be directly ascribed to
indirect taxation ; for indirect taxes, by annihilating a part
of the annual reproduction of wealth, destroy wages and the
means of subsistence. The increase of beggary, again, in
last resort means an additional burden on the landowners;
for they dare not refuse alms. 1

Quesnay is severe on the landowners for not recognizing
the wisdom of the single tax. The tax seems to them exces-
sive. Their ignorant cupidity has never allowed them to see
that taxes can really be imposed only on the revenue of the
land. They have always thought that taxes ought to be
levied on men or on the things consumed by men, because
all men share in the benefits of the protection of government.
They have never reflected that man, whose physical consti-
tution depends on the satisfaction of his wants, can do noth-
ing by himself ; and that all taxes imposed on men, or on the
things they consume, are necessarily taken from the wealth
on which men live and which the land alone produces. 2

1 Daire, pp. 139, 140; Oncken, pp. 716, 717.

2 " Mais ce revenu public de 800 millions, qui embrasse directement les deux
septtemes du produit net du territoire, aurait paru excessif aux proprie"taires fon-
ciers. Leur cupidite ignorante ne leur a jamais laisse apercevoir que 1'impot ne
doit 6tre pris que sur le revenu des terres. Us ont toujours pense que 1'impot
devait etre etabli sur les hommes ou sur les consommations que font les hommes,
parce que les hommes participent tous a la protection de la puissance souveraine.

IO2 Shifting and Incidence of Taxation

As a result of his whole discussion, Quesnay concludes
that no matter how it is arranged, the productive class, the
landowners and the tax itself as the first distributors of
the total expenses inevitably pay the whole of the indirect
taxes levied on the men they employ, or on the goods and
commodities they consume; and each one contributes to the
tax in proportion to his share of the expenses. 1

Quesnay 's theories were soon adopted by a number of en-
thusiastic followers. The Marquis of Mirabeau devoted a
special book to the subject of taxation, laying down the gen-
eral principle that "taxes should be levied directly on the
annual reproduction," or " on the source of all revenue." 2
In another place he points out that no matter how the tax is
imposed, it must be paid from the net product; and unless
it is assessed directly on this product we are without base or
compass. 3 A few years later another writer, Saint P6ravy,
devoted a separate work to the study of indirect taxes, from
the same point of view. 4

Mercier de la Riviere, perhaps the clearest thinker of the
Physiocrats, took especial pains in making this distinction

Us n'ont nullement songe que 1'homme, dont la constitution physique ne presente
que des besoins, ne peut rien par lui-mSme; et que toute imposition mise sur les
hommes, ou sur leur consommation, serait necessairement prise sur les richesses
qui font subsister les hommes, et que la terre seule produit." Daire, p. 131;
Oncken, p. 704.

1 "Ainsi, de quelque fa$on qu'on s'arrange, la classe productive, les pro-
prietaires des terres, et 1'impot meme, comme premiers distributeurs des depenses
payent inevitablement la totalite de 1'imposition indirecte que 1'on etablit sur les
hommes qu'ils salarient, ou sur les denrees et marchandises qu'ils consomment;
et ils y contribuent chacun a raison de la distribution de ses depenses." Daire,
p. 134; Oncken, p. 707.

2 " L'Imp8t doit Stre etabli immediatement sur la reproduction annuelle."
Theorie de VImpbt. [Par Le Marquis de Mirabeau.] 1760, p. 123. "Que
1'impot soit etabli immediatement a la source des revenus." Ibid. t ^. 131. In
the more common octavo edition of 1761 these passages are found on pp. 150
and 1 60.

8 " De quelque maniere que se retourne 1'impot il est impossible qu'il provienne
d'autre part que du produit; s'il n'est pris directement sur le produit net qui
constitue le revenu, il n'a plus ni base, ni boussole." L'Ami des Hommes, ou
Traite de la Population, 1757, tome vii, p. 45. Cf. pp, 47, 171.

4 Memoir e sur les Effets de Pimpot Indirect. Par Saint Peravy. 1768.

The Physiocratic Theory 103

between direct and indirect taxes hinge on the question of
incidence. The essential form of taxation, he tells us, con-
sists in taking the tax directly where it is, and in not trying^
to take it where it is not. It is clear that the funds destined
to the payment of taxes are to be found only in the hands
of the landowners, or rather of the farmers. They receive
these funds from the land, and when they give them up to
the king, they are not really giving anything that belongs to
them. On them, therefore, we must lay the tax, if we wish
to burden nobody. To change this direct form of taxation,
and to give it an indirect form, is to reverse the natural order,
from which we cannot deviate without the greatest evils.
Taxation is indirect, when it is levied on persons or on com-
modities. In both cases the damage to the king and to the
people alike is enormous and inevitable. 1

The evils above referred to, he tells us in another passage,
are inherent in the very nature of indirect taxes. The name
itself tells us that the tax is not borne by those on whom it
seems to be directly laid ; and that is perfectly true. Even
when it appears to have nothing to do with the landowners,
it falls on them and with considerable additions; for it
always costs them more than the king receives. In certain
cases it even causes them to suffer losses which redound to

1 " Ainsi la forme essentielle de 1'impot consiste a prendre directement 1'impot
ou il est, et a ne pas vouloir le prendre ou il n'est pas. ... II est evident que les
fonds qui appartiennent a 1'impot ne peuvent se trouver que dans les mains des
proprietaires fonciers, ou plutot des cultivateurs ou fermiers qui, a cet egard, les
represented; ceux-ci recoivent ces fonds de la terre meTne et, lorsqu'ils les rendent
au souverain, ils ne donnent rien de ce qui leur appartient; c'est done a eux qu'il
faut demander 1'impot, pour qu'il ne soit a la charge de personne. Changer cette
forme directe de 1'etablissement de 1'impot pour lui donner une forme indirecte,
c'est renverser un ordre naturel dont on ne peut s'ecarter sans les plus grands
inconvenients.

"La forme de 1'impot est indirccte lorsqu'il est Stabli ou sur les personnes
memes ou sur les choses commergables : dans 1'un et 1'autre cas, les prejudices
qu'il cause au souverain et a la nation sont enormes et inevitables, et ils sont
a-peu-pres les memes, quoiqu'ils ayent une marche et une gradation differ-
entes." U Ordre Naturel et Essentiel des Societes Politiques. [Par Mercier
de la Riviere.] Londres, 1767, chap, xxx, p. 243. In Daire, Physiocrates, it is
reprinted as chapter iv, p. 474.

IO4 Shifting and Incidence of Taxation

no one's advantage, and it thus brings about a progressive
decrease in the total quantity of wealth. 1

Therefore, he concludes, in the essential order of society
(to outline which his whole book is written) taxation is en-
tirely independent. The revenue it yields is the necessary
result of a combination of causes which always remain the
same and always produce the same effects. But this valu-
able advantage can be retained only so far as its essential
form is not changed, and as the king directly seizes the
portion that his co-ownership in the lands of his dominion
gives him a right to take. 2

The great popularizer of the Physiocratic doctrines, Du
Pont de Nemours, who subsequently tried to impress his ideas
of incidence on the French revolutionary parliament, put
the theory in a little different way. 3 Taxes, he tells us, can-
not be imposed indifferently on all kinds of wealth. Nature
has not given to that form of wealth which is used in agri-
cultural production the power of making any contribution
to taxes. She has, in fact, imperiously subjected it to the
law of being wholly consumed in keeping up the cultivation
of the land itself, on pain of seeing cultivation, the crops, the
people, the empire itself gradually disappear. That portion

1 " Les inconvenients dont je veux parler sont dans la nature mSme de Pimpot
indirect. Le nom qu'on lui donne ici annonce qu'il n'est point supporte par
ceux sur lesquels il semble etre directement etabli, et cela est vrai : lors meme qu'il
parolt totalement etranger aux proprietaires fonciers, il retombe sur eux, et a
grands frais, car il leur coute toujours beaucoup plus qu'il ne rend au Souverain; il
leur occasionne m8me, en certains cas, des pertes seches dont personne ne profite, des
diminutions progressives de la masse commune des richesses disponibles, dans les-
quelles le Souverain doit partager, et qui sont la mesure de sa puissance politique."
L'Ordre Natural et Essentiel des Societes Politiques, p. 247. In Daire's ed., p. 476.

2 "Ainsi, dans 1'ordre essentiel des societes, Pimpot est totalement inde"pendant;
le produit qu'il donne annuellement est le fruit necessaire d'un enchatnement de
diverses causes qui seront toujours les mSmes, et qui produiront toujours les mSmes
effets. Mais il ne peut conserver cet avantage precieux qu'autant qu'on ne change
point sa forme essentielle, que le souverain prend directement la part proportion-
nelle que sa copropriete lui donne droit de prendre dans les produits nets des
terres de sa domination." Ibid., p. 249. In Daire's ed., p. 478.

8 In his De VOrigine et des Pr ogres d'une Science Nouvelle. [Par P. S. Du
Pont du Nemours.] Londres, 1768. In Daire's Physiocrates, p. 335.

The Physiocratic Theory 105

of the crops which is called the net produce is, then, the only
part naturally subject to taxation. 1

The aim of taxation, Du Pont tells us in another place, is *
the preservation of the rights of property and of liberty in V
their original and natural extent. All kinds of taxes which /
curtail liberty and property, and which therefore necessarily \
diminish wealth and population, would thus be clearly con- \
trary to the aim of taxation. If duties were levied on persons,
on commodities, on expense, or on consumption, their collec-
tion would be costly, their existence would impede the liberty
of human effort, and they would necessarily increase the ex-
penses of commerce and agriculture. 2

Coming, then, more specifically to the problem of shifting,
Du Pont contends that when an indirect route is taken in the
assessment of a tax, it is none the less paid, in last analysis,
by the net produce of land. But it is then extremely disas-
trous and much more burdensome to the landowners. It cur-
tails liberty and restrains property; it lowers the price of
produce in the hands of the producer ; it decreases the mass
of products, and still more the sum of national revenues ; it
leads to misery and depopulation; it ruins by degrees the

1 " L'impot ne saurait mSme porter indifferemment sur toutes les richesses
renaissantes. La nature a refuse a celles qu'on appelle reprises des cultivateurs
la faculte de contribuer a I'imp&t, puisqu'elle leur a imperieusement impose la loi
d'8tre employees en entier a entretenir et a perpetuer la culture, sous peine de
voir aneantir par degres la culture, les recoltes, la population, les empires.

" La portion des recoltes nominee le produit net, est done la seule contribuable
a 1'impot, la seule que la nature ait rendue propre a y subvenir.

" II est done de V essence de 1'impot d'Stre une portion du produit net de la
culture." Ibid., p. 35 1.

2 " Le but de 1'impot est la conservation du droit de propriete et de la liberte
de 1'homme dans toute leur etendue naturelle et primitive ; conservation qui peut
seule assurer la multiplication des richesses et de la population.

"Toute forme d'imposition qui restreindrait la propriete et la liberte de rhomme,
et qui diminuerait necessairement les richesses et la population, serait done mani-
festement opposee au but de I'imp8t.

" Si 1'on etablissait des impositions sur les personnes, sur les marchandises, sur
les depenses, sur les consommations, la perception de ces impositions serait fort
couteuse ; leur existence gSnerait la liberte des travaux humains, et augmenterait
necessairement les frais de commerce et de culture." Ibid., pp. 351, 352.

io6 Shifting and Incidence of Taxation

soil, the farmers, the landowners, the nation and the king. 1
It is no wonder that, holding such views, the Physiocrats
summed up their theory of taxation in the famous phrase :
Indirect taxes, poor peasants ; poor peasants, poor kingdom ;
poor kingdom, poor king. 2

The Abbe Baudeau develops the same line of thought.
Instead of the net produce, he speaks of " the clear and liquid
annual revenue of land," which he thinks is so simple an idea
that it is self-evident. 3 Baudeau emphasizes the fact already
alluded to by Quesnay, and subsequently worked out more
lucidly by Turgot namely, that a part of this "clear reve-
nue" must really be regarded as belonging not to the owner
but to the king ; and that therefore, when a man buys a piece
of land, he buys not the whole of its revenue, but only that
part which is not due to government. The payment due to
the king by virtue of his right of sovereignty is, therefore,
not really a tax at all ; it is not, as many people say of taxa-
tion in general, a sacrifice which each citizen makes of a part
of his property in order to keep the rest. 4

1 " Nous venons de voir que lorsqu'on veut prendre une route indirecte pour
lever I'impSt, il n'en est pas moins paye, en derniere analyse, par le produit net
des biens-fonds; mais qu'il 1'est alors d'une maniere extremement desastreuse et
beaucoup plus onereuse pour les proprie*taires fonciers; qu'il g8ne la liberte et
restreint la propriete des citoyens; qu'il fait baisser le prix des productions, a la
vente de la premiere main; qu'il diminue la masse des produits, et encore plus la
somme des revenus du territoire; qu'il amene la misere et la depopulation; qu'il
ruine par degres la culture, les cultivateurs, les proprietaires fonciers, la nation et
le souverain." De V Origins et des Pr ogres d'une Science Nouvelle, p. 354.

2 " Impositions indirectes; pauvres paysans. Pauvres paysans; pauvre roy-
aume. Pauvre royaume; pauvre roi." Ibid., p. 354.

8 " Vouloir connaitre le revenu clair et liquide annuel de chaque terre par esti-
mation commune de son etat habituel, c'est done chercher une chose toute trou-
vee." Premiere Introduction & la Philosophic conomique t ou Analyse des tats
Polices. [Par Nicolas Baudeau.] 1771. In Daire's Physiocratcs, p. 767. Similar
ideas may be found in Baudeau's earlier work, Lettres d'un Citoyen a un Magis-
trat sur les Vingtiemes et les autres Impots. 1768.

4 "Tout proprietaire saurait qu'il n'acquiert pour ses heritiers, pour ses ces-
sionnaires ou ayant-cause, que quatorze vingtiemes, ou un peu plus de deux tiers,
du produit net annuel d'un fonds mis en exploitation; que le reste n'est pas a lui,
mais a la souverainete.

" II sait que le droit de la souverainete, sur un peu moins du tiers des revenus

The Physiocratic Theory 107

The specific question of the incidence of export and im-
port duties, as well as of taxes on communication and trans-
portation in general, was treated at considerable length by
another of the Physiocrats, Le Trosne. Most of what he
says deserves careful attention even to-day, especially when
he discusses the conditions under which a part of the export
or import duties is supposed to rest finally on the foreign
country. 1 But these are points of detail, the consideration of
which would lead us too far astray in this place.

The most cautious as well as the greatest of the Physio-
crats was Turgot. In discussing the question of the real
incidence of the land tax, Turgot expounds very clearly what
came to be known subsequently as the capitalization theory.
If land alone were subject to taxation, says he, once the tax
was settled, the capitalist purchaser would not count in the
interest of his money the part devoted to the payment of the
tax just as a man who to-day buys a piece of land does not
buy the tithe which the priest receives or the land tax, but
buys only the income which remains after deducting the
tithe and the tax. 2

territoriaux clairs et liquides, est fonde, comme tout droit juste et raisonnable, sur
des avances faites, sur des travaux accomplis ci-devant, et encore sur les mSmes
avances, les mSmes travaux a continuer; sur leur efficacite, productive de ces
m8mes revenus, dont ils sont une cause efficiente, une des conditions indispensa-
bles sans lesquelles il n'existerait point un tel produit net.

" Cette perception, ainsi reglee, n'a done point les caracteres de ce qu'on appelle
impot; ce n'est point, comme on le dit avec quelque apparence de raison dans les
Etats mal administres, un sacrifice que chacun fait, d'une portion de sa propriete,
pour conserver le reste." Daire's Physiocratcs, pp. 762, 763.

1 De V Inter et Social, par rapport a la Valeur, a la Circulation, a V Industrie
et au Commerce Interieur et Exterieur. Par Guillaume-Francois Le Trosne.
1777. In Daire's Physiocrates, esp. pp. 988-1007.

2 " Je reponds, en second lieu que, si les terres etaient chargees seules de la
contribution aux depenses publiques, des qu'une fois cette contribution serait
reglee, le capitaliste qui les acheterait ne compterait pas dans I'intergt de son
argent la partie du revenu affectee a cette contribution ; de m8me qu'on homme
qui achete aujourd'hui une terre n'achete pas la dime que re?oit le cure, ni meTne
1'impot connu, mais le revenu qui reste, deduction faite de cette dime et cet
impot." Reflexions sur la Formation et la Distribution des Richesses, 97. Cf.
his Comparaison de P Impot direct et de r Impot indirect, in (Euvres de Turgot,
edited by Daire. Paris, 1844, i, p. 413.

io8 Shifting and Incidence of Taxation

In an early memoir, written in 1764, Turgot maintains that
all taxes must be paid out of income. He then proceeds to a
discussion of income in general, in the course of which he
elaborates the doctrine of the produit net which alone con-
stitutes the real social revenue, disposable for purposes of
taxation. The landowner, says he, is the only one who has
a real income : l every other conception of income is illu-
sory. 2 It follows, therefore, that all taxes, howsoever levied,
are ultimately paid from this income.

This leads Turgot to distinguish between direct and indi-
rect taxes. In a later memoir, he gives a formal definition
of these terms. The tax which the landowner pays immedi-
ately out of his income, he tells us, is called a direct tax ; the
tax which is not directly assessed on the income is called an
indirect tax. Indirect taxes may be reduced to three chief
classes : the tax on the tenant farmer, the tax on the profits
of capital or industry, and the tax on commodities sold or
consumed. The landowner, however, bears the burden of
the indirect tax in two ways : through an increase of his
expenses, and through a decrease of his income. 3 The term

1 "Le proprietaire de fonds est le seul qui ait un veritable revenu." Plan
d'un Memoire sur Us Impositions en General, etc., in QZuvres de Turgot, i,
p. 400.

2 " Tout autre idee de revenu est illusoire. Lorsqu'on achete un bien-fonds,
c'est ce revenu seul qu'on achete." Ibid., p. 402.

8 " L'impot que le proprietaire paye immediatement sur son revenu est appele
impbt direct. L'impot qui n'est point assis directement sur le revenu du proprie-
taire, mais qui porte ou sur les frais productifs du revenu, ou sur les depenses de
ce revenu, est appele impbt indirect.

" L'impot indirect, malgre la variete des formes dont il est susceptible, peut se
reduire a trois classes :

" L'impot sur les cultivateurs; 1'impot sur les profits de 1'argent ou de Pindus-
trie; 1'impot sur les merchandises passantes, vendues ou consommees.

" Ces trois classes, et les differentes formes d'impositions dans lesquelles elles se
subdivisent, peuvent retomber sur les proprietaires par un circuit plus ou moins
long, et d'une maniere plus ou moins onereuse.

" Les proprietaires payent 1'impot indirect de deux facons, en augmentation de
depense et en diminution de revenu." Explications sur le Sujet du Prix offert
par la Societe Royale de V Agriculture de Limoges au Memoire dans lequel on
aurait le mieux demontre PEffet de P Impbt Indirect sur le Revenu des Proprie-
taires de Bien-Fonds ; in CEuvres de Turgot, i, pp. 416, 417.

The Physiocratic Theory 109

"indirect tax," therefore, covers every tax except a direct
tax on the net revenue of land. 1

In another place, Turgot tries to meet the objection of
those who maintained that wealth in general is the source of
taxation. It is not all real wealth, he tells us, that can pay
taxes. To serve this purpose, wealth must be disposable,
that is, it must not be needed for the reproduction of the
following year, directly or indirectly. All wealth may indeed
be taken by main force ; but no wealth necessary to the work
of reproduction can be diverted from this end without injury
to the national wealth, and consequently to the power of the
government. In the recognition of this principle consists the
whole theory of taxation. 2

Finally, in a memoir said to have been written for Ben-
jamin Franklin, Turgot develops more fully his theories of
the shifting of all indirect taxes to the landowner. 3 Yet, not-
withstanding his theories, Turgot, while at the head of the
treasury, made no attempt, as is sometimes asserted, to put
the plan of the single tax into actual operation. He was too
great a statesman to commit himself to any such hazardous
scheme.

The Physiocrats, it may be remarked in passing, exercised a
perceptible influence on contemporary American thought. In

1 Elsewhere, however, Turgot also classes a poll tax as a direct tax. But if the
poll tax be graded so as to reach the " faculties, industry, profits or wages," it
must be called an indirect tax. Ibid., i, p. 396.

2 " Ce n'est pas toute richesse reelle, comme le croit 1'auteur, qui peut payer
I'impdt; il faut encore qu'elle soit disponible, c'est-a-dire qu'elle ne soit pas
necessaire a la reproduction de 1'annee suivante, soit immediatement, soit mediate-
ment. Toute richesse necessaire aux travaux de la reproduction n'en peut etre
detournee sans nuire a cette reproduction, a la richesse nationale, et par suite aux
moyens de puissance du gouvernement. Voila toute la theorie de I'impSt." In
Observations sur le Memoire de M. Graslin en faveur de flmpot Indirect.
(Euvres, i, pp. 434, 435.

3 Comparaison de I 'Impot sur le Revenu des Proprietaires et I 'Impot sur les
Consomntations. (Euvres, ii, p. 409. Du Pont de Nemours says that this was
written to dissuade Hamilton, then Secretary of the Treasury, from adopting his
scheme of indirect taxes. But as Turgot had been dead several years before
Hamilton formulated his scheme, this is clearly impossible. Yet the statement
that the memoir was originally written for Franklin may be true.

no Shifting and Incidence of Taxation

a number of the writings of the foremost American statesmen
there are continual references to the doctrines of the " Econ-
omists." Benjamin Franklin, for instance, carried on an
extended correspondence with the Abbe Morellet and with
Le Veillard. In one of his later letters, he refers to the doc-
trine as among the principles of economics which he origi-
nally shared ; but his great practical sense convinced him of
the futility of the attempt to apply the scheme in America. 1
Alexander Hamilton also seems, in one of the essays in the
Continentalist, to have shared the opinions of the Physio-
crats. 2 A careful reading of the context, however, shows that
Hamilton did not advocate any scheme for a single tax on
land. In fact, he adds in another place that " particular
caution ought at present to be observed in this country, not
to burden the soil itself and its productions with heavy
impositions."

An eminent French writer, M. Leroy-Beaulieu, has fallen
into a curious error. The Physiocrats, according to him,
held that, even if the single tax were imposed, the landowners
would lose nothing because their products would rise in price
and would thus reimburse the proprietors for their original
outlay. 3 This, however, is a mistake. The cardinal doctrine
of the Physiocrats was that all taxes fall ultimately on the

1 " I have not lost any of the principles of public economy you once knew
me possessed of. ... Our legislators are all landowners, and they are not
yet persuaded that all taxes are paid by the land." Letter to Mr. Small, 1787.
In The Complete Works of Benjamin Franklin, edited by John Bigelow. New
York, 1887, ix, p. 414.

2 " Many theorists in Political Economy have held, that all taxes, wherever
they originate, fall upon land, and have therefore been of the opinion that it
would be best to draw the whole revenue of the state immediately from that
source. . . . But though it has been demonstrated that this theory has been
carried to an extreme, impracticable in fact, yet it is evident, in tracing the matter,
that a large part of all taxes, however remotely laid, will, by an insensible cir-
culation, come at last to settle upon land the source of most of the materials
employed in commerce." The Continentalist, vi, 1782. In The Works of
Alexander Hamilton, edited by Henry Cabot Lodge. New York, 1885, i, p.
266.

8 Science des Finances. Par Paul Leroy-Beaulieu. Paris, 1892, 5th ed., i,
p. 199.

The Physiocratic Theory in

landowners, and on them alone. 1 It was just because the
Physiocrats supposed that the tax could not be shifted that
they advocated the single tax. The landowners would, in-
deed, in their opinion, suffer less from a direct tax than from
an indirect tax ; for not only would the indirect taxes yield so
little, relatively, that higher rates would be necessary, but
they would tend to destroy the foundations on which the
prosperity of the landowners rested. But the direct tax,
even though less destructive, would still remain on those
on whom it was originally imposed the owners of the
soil.

The Physiocratic doctrine of incidence does not need any
formal refutation. Resting on the peculiar doctrine of the
sole productivity of agriculture, it has been convicted of
exaggeration and unreality. 2 The Physiocrats' theory of dis-
tribution and their conception of natural law may be said to
have ushered in the modern period of economic science.
But Adam Smith, who was in these respects so profoundly
influenced by the Physiocrats, shattered the very foundations
on which their third fundamental doctrine that of the pro-
duit net was based. If the Physiocrats developed what

1 " Tout imp6t est paye par le produit des terres, tout ce que I'imp8t prend sur
ce produit, apres les partage fait par le souverain, forme un double emploi; tout
double emploi retombe sur les proprietaires fanciers." L? Ordre Naturel, etc.
Par Mercier de la Riviere, chap, vii (p. 504 of Daire's ed.). "Tous les impots
sous quelque forme qu'ils soient percus retombent necessairement k la charge des
proprietaires des biens fonds, et sont toujours en dernier e analyse payes par eux
seuls, ou directement, ou indirectement." Explications sur fejfet de I" 1 Impbt
Indirect, in CEuvres de Turgot (Daire's ed.) i, 416.

2 A good exposition of its' weakness is made by Arthur Young in his Political
Arithmetic, 1774, pp. 208-266. The best contemporary French refutation is con-
tained in Essai Analytique sur la Richesse et sur V Impbt, ou Von refute la nou-
velle doctrine economique . . . sur I'effet des Impots indirects. Par Louis Frangois
de Graslin. Londres, 1767. Graslin not only denies that the so-called indirect
taxes are shifted to land, but contends that a tax imposed directly on land is some-
times shifted to the consumer. Ibid., pp. 230 et al. Another work very widely
read at the time was the anonymous volume written to answer Mirabeau's book
on taxation, under the title Doutes proposes a VAuteur de la Theorie de V Impbt.
1761. See especially pp. 24-48, "Sur quoi doit-on preferablement fake porter
les impositions ? "

H2 Shifting and Incidence of Taxation

might be called the agricultural system of economics, Adam
Smith is responsible for the industrial system. Yet their
theories of the incidence of taxation, apart from the peculiar
doctrine of the produit net, are not so dissimilar as might be
imagined.

CHAPTER II
THE ABSOLUTE THEORY

ON the subject of the incidence of taxation, as on almost
every topic of economic inquiry, modern views are commonly
traced back to the works of Adam Smith and Ricardo. For
reasons that will soon appear, the doctrines advanced by
these great thinkers may be summed up under the name of
the absolute theory of incidence.

Adam Smith bases his investigation on the division of all
revenue into rent, profits and wages. All taxes on land,
says he, whether proportional to the rent or to the whole
produce, are in reality taxes on rent. Although they may
be originally advanced by the tenant, they are finally paid
by the landlord. A tax on land rent necessarily falls on
the owner ; for the " farmer computes, as well as he can,
what the value of the (tax) is, one year with another, likely
to amount to, and he makes a proportionable abatement in
the rent which he agrees to pay to the landlord." The
farmer must have his reasonable profit as well as every other
dealer. Hence " the more he is obliged to pay in the way
of tax, the less he can afford to pay in the way of rent." l
The case of a tax on house rent is slightly different, because
house rent is really distinguishable into two separate ingre-
dients building rent and ground rent. The tax on ground
rent, like that on the rent of land, will inevitably fall on the
owner, because " the more the inhabitant was obliged to pay
for the tax, the less he would incline to pay for the ground." 2

1 An Inquiry into the Nature and Causes of the Wealth of Nations. By
Adam Smith, LL.D. London, 1776, book v, chap. ii. Vol. ii, pp. 417, 428. The
quotations are from the edition of James E. Thorold Rogers, 2d ed., Oxford, 1880.

2 Ibid., ii, pp. 437, 440.

I 113

H4 Shifting and Incidence of Taxation

But that part of the rent which represents the building rent
is simply the profits of the capital expended in building the
house. This part of the tax will necessarily fall on the oc-
cupier ; because, unless the builder secures the same return
on his capital as other business men do, he will cease build-
ing houses until the increased demand for houses again
raises the rent that is, in this case, his profits to the
general level. A tax on house rent will therefore fall partly
on the owner and partly on the occupier, but " in what pro-
portion this final payment would be divided between them,
it is not perhaps very easy to ascertain." 1

Taxes on profits are simple of analysis. The profit arising
from stock is divided by Adam Smith into two parts, that
which pays the interest, and the surplus over and above the
interest. A tax on the surplus above interest is always
shifted, for this surplus is the "compensation for the risk
and trouble of employing the stock" which the employer
must have if he desires to continue the employment. It will
be shifted either to the landowner or to the consumer, ac-
cording as the stock is employed in farming or in mercantile
business. 2 For if he employed it as "farming stock," he
could raise the rate of his profit only by reducing the
amount he is called upon to pay to the landlord, that is,
the rent. But if he employed it as a " mercantile or manu-
facturing stock," he could raise the rate of profit only by
raising the price of his goods.

A tax on interest that is, on what Smith regards as "the
net produce which remains after completely compensating
the whole risk and trouble of employing the stock " seems
to fall entirely on the owner, just as in the case of a tax on
rent. But in reality the interest on money is a much less
proper subject of direct taxation than rent, because land is
tangible and easily ascertainable, while capital is not; and
because land cannot be removed, while stock easily may be.
To tax stock, therefore, would cause its removal from the

1 An Inquiry into the Nature and Causes of the Wealth of Nations, ii, p. 434.

2 Ibid., ii, p. 441.

The Absolute Theory 115

country, and put an end to all the industry which it had
maintained. This would reduce not only the profits of
stock, but also the rent of land and the wages of labor. A
general tax on profits, therefore, affects other classes besides
the employer. 1 A tax on the profits of stock employed in
any particular branch of trade will, however, be shifted
from the dealers to the consumers because the dealers
must "in all ordinary cases have their reasonable profit."
The consumers will have to pay, in the enhanced price of
their goods, not only the tax advanced by the dealer, but
generally some overcharge in addition. 2

Taxes on wages, finally, are always shifted. This is due
to the fact that the rate of wages is regulated by the demand
for labor and by the average price of food. When these
remain the same, a direct tax on wages "can have no other
effect than to raise them somewhat higher than the tax." If
the laborers were engaged in "manufacturing labor," the
employer would have to raise wages, but would ultimately be
obliged to charge the increase with a profit on the consumers.
If the laborers were engaged in husbandry, the farmer would
in the long run pay less rent to the landlord. But both the
reduction of the rent and the rise of price will be greater
than the amount of the tax. 3 Whenever taxes on labor have
not produced a proportionate rise in wages, it is because they
have led to a fall in the demand for labor. The only results
of this, however, have been a "declension of industry, a
decrease of employment, and a diminution of the annual
produce of the land and labor of the country." Even then,
wages must always be higher than they would otherwise have
been, and this increase of price must be finally paid by the
consumers. The same argument holds good of the " recom-
pense of ingenious artists and of men of liberal professions " ;
but it does not apply so completely to " the emoluments of

1 "The proprietor of stock is properly a citizen of the world and is not neces-
sarily attached to any particular country." Ibid., ii, p. 443.

2 Ibid., ii, p. 446.

3 Ibid., ii, p. 461.

n6 Shifting and Incidence of Taxation

offices," because these are not regulated by the free competi-
tion of the market.

Finally, Adam Smith discusses taxes which are intended
to "fall indifferently on every species of revenue." These
are capitation taxes and taxes on consumable commodities.
Capitation taxes, so far as they are levied on the lower classes,
are taxes on wages, and subject to the same objections as
those taxes, that is, they are shifted to the consumers. 1
Taxes on commodities are levied either on necessaries or on
luxuries. Taxes on necessaries raise the rate of wages (be-
cause wages are fixed partly by the price of necessaries) and
fall on the consumers or landlords. They act precisely like
taxes on labor. Taxes on luxuries, on the other hand, will
not raise wages, but will fall only on the consumers of the
particular commodities. So far as the poor are concerned,
they act simply as sumptuary laws. It is, therefore, always
to the interest of the richer classes to oppose taxes on neces-
saries; for all taxes on necessaries are ultimately paid by
them, while taxes on luxuries fall on them only to the extent
that they are consumers of luxuries. 2

If we sum up Adam Smith's doctrine of incidence, we see
that taxes on wages, taxes on profits (except the tax on inter-
est), and taxes on necessaries are always shifted. On the
other hand, taxes on land and taxes on luxuries always stay
where they are put. The classes of society who bear all the
taxes are thus primarily the landowners, the rich consumers
and, to a certain extent, the lenders of capital.

Adam Smith's exposition, marked as it is by many pro-
found and suggestive ideas, is entirely dependent upon his
theories of rent, profits and wages. As soon as we question
the validity of his theory of rent, of his treatment of wages
as based on the necessaries of life, or of his conception of
ordinary profits, a large part of his doctrine of incidence falls
to the ground. Modern economic theory no longer accepts
these bases of his theory. Ricardo himself did much to over-

1 An Inquiry into the Nature and Causes of the Wealth of Nations, ii, p. 466.

2 Ibid., ii, p. 470.

The Absolute Theory 117

throw them. But so far as Adam Smith based his doctrine
of incidence on the theory of free competition without any
qualifications, and on the inevitable action of simple economic
causes, he may be termed in a certain sense the forerunner
of the absolute theory of incidence.

Ricardo's Principles of Political Economy and Taxation is
largely devoted to the latter subject. With his accustomed
penetration, Ricardo went at once to the core of tax problems,
so that his work consists almost exclusively of an investiga-
tion of the problem of incidence. His discussion of this topic
discloses the same merits and the same defects which are so
characteristic of his other work. On the one hand, profound
and acute analysis, marvellous power of isolating the phe-
nomena and treating them as unaffected by disturbing causes ;
on the other hand, the implication that the hypothetical case
is the real one, the inference that the formulae deduced with
mathematical accuracy and logical rigor from the assumed
premises represent the actual economic facts ; these char-
acteristics constitute at once the strength and the weakness
of the Ricardian theories.

Ricardo, like Adam Smith, does not give any general theory
of incidence. In both cases we must seek for the general
principles of the authors in the discussions of separate taxes.
Ricardo differs from Adam Smith in his theory of rent and
in his doctrine of the relation of profits to wages. Ricardo's
theory of economic rent leads him to controvert Adam Smith's
doctrine of the ultimate incidence of land taxes on the land-
owner. A tax on rent, it is true, says Ricardo, will fall
wholly on the landlord ; for since rent is the surplus above
the cost of production, the value of the product cannot pos-
sibly be affected by the tax. 1 But it is different with taxes
on produce, tithes or land taxes : these will be shifted by the
landowners to the consumers. Since price is fixed by the

1 "A tax on rent would affect rent only; it would fall wholly on landlords, and
could not be shifted to any class of consumers." On the Principles of Political
Economy and Taxation. By David Ricardo, Esq. London, 1817, chap, viii*,
p. 221, In McCulloch's edition, 1876, this is found in chap, x, p. 102.

n8 Shifting and Incidence of Taxation

cost of production on land of the poorest quality, runs his
argument, whatever increases cost raises price. But a tax
which is imposed on all cultivators necessarily increases the
cost of production. Hence, a tax on produce raises price and is
shifted to the consumers. A rise in price is the only means
by which the cultivator can pay the tax and continue to
derive "the usual and general profits " from the employment
of his capital. He cannot deduct the tax from his rent, for
there is no rent on the land which fixes price. He will not
deduct it from his profits, because there is no reason why he
should stay in an employment with smaller profits. He can,
therefore, pay the tax only by increasing the price. 1

All land taxes, accordingly, except the tax on pure rent, will,
according to Ricardo, fall on the consumers. But although
every one is a consumer, not all consumers will pay the tax.
One large class, in particular, will remain exempt the
laborers; for a tax on raw produce, like any tax which in-
creases the price of necessaries of life, will inevitably raise
wages. " Wages never continue much above that rate which
nature and habit demand for the support of the labourer."
But as wages rise, profits must fall. A land tax will there-
fore fall not on the landlord or the stockholders, but on the
capitalist employer of labor. 2

The question still remains whether the employer can shift
the tax. In other words : What is the incidence of a tax on
profits ? Ricardo agrees with Adam Smith in holding that a
tax on the profits of a particular class will be shifted to the
consumers through a rise in price. But in the case of a tax
on all profits, the problem is less simple. If no attention be
paid to foreign trade, a rise of prices will ensue. But since
money is a commodity imported from abroad, a rise in

1 On the Principles of Political Economy and Taxation, chap, viii, pp. 194,
195, and chap, ix, p. 225. In McCulloch's ed. these are chap, ix, p. 91; and
chap, xi, p. 104.

2 Ibid., p. 199 (McCulloch's ed., p. 93). Ricardo seeks to prove that there
will not be any considerable interval between the rise in the price of corn and
the rise of wages, during which the laborer would suffer. Here, as elsewhere,
however, his conclusions are too rigid.

The Absolute Theory 119

prices, if it occurred, could not be permanent. In return for
commodities imported, the dear goods could not be exported.
On the contrary, money would be exported until prices had
fallen to their former level. The inference is that a tax
on profits will be borne, not by the consumer, but by the
producer. 1

Finally, a tax on wages, he contends, will raise wages.
Ricardo here discusses the objections raised by Buchanan to
the doctrine of Adam Smith. He does indeed make the two
important concessions that every rise in the price of necessa-
ries does not necessarily raise wages, and that wages are not
generally increased by the amount of the tax. 2 But with his
characteristic fondness for the larger aspects of a problem, he
goes on to argue as if these concessions did not invalidate his
general doctrine. On the assumption, then, that taxes do raise
wages, Ricardo concludes that they inevitably decrease prof-
its. 3 He objects, however, to Adam Smith's contention that
the tax will be shifted to the consumers. For, says he, since
all producers are consumers of each other's goods, every
dealer would raise his prices by the increase which he is
compelled to pay ; and this process would go on indefinitely,

1 " It appears to me absolutely certain that a well-regulated tax on profits
would ultimately restore commodities, both of home and foreign manufacture, to
the same money price which they bore before the tax was imposed." Ibid. t
chap, xiii, p. 283. (McCulloch's ed., chap, xv, p. 127.) Cf. chap, xvi, pp. 354,
355. (McCulloch's ed., chap, xviii, p. 155.)

2 " It must therefore be conceded to Mr. Buchanan that any rise in the price
of provisions occasioned by a deficient supply will not necessarily raise the money
wages of labor. Taxes so far as they impair the net capital of the country dimin-
ish the demand for labor, and therefore it is a probable, but not a necessary, nor a
peculiar consequence of a tax on wages, that though wages would rise, they would
not rise by a sum precisely equal to the tax." Ibid., chap, xiv, pp. 288, 289, 297.
(McCulloch's ed., chap, xvi, pp. 130, 133.) Yet in the very next paragraph he
says that he agrees with Adam Smith.

3 " Taxes on wages will raise wages, and therefore will diminish the rate of the
profits of stock . . . The only difference between a tax on necessaries and a tax
on wages is that the former will necessarily be accompanied by a rise in the price
of necessaries but the latter will not ... A tax on wages is wholly a tax on
profits, a tax on necessaries is partly a tax on profits and partly a tax on rich con-
sumers." Ibid., p. 285. (McCulloch's ed., p. 129.)

I2O Shifting and Incidence of Taxation

which is absurd. 1 Since the tax would, therefore, rest on
profits, it is immaterial whether the taxes be levied on profits
or on wages. It is always the profits of stock on which these
taxes ultimately fall.

It will be readily seen that these teachings of Ricardo
depend on the wage-fund theory, on his doctrine of profits,
and on the law of economic rent. They stand or fall with
the acceptance or rejection of his general theory of dis-
tribution. Two points, however, must be brought promi-
nently forward on the one hand, the difference between
Adam Smith and Ricardo in results ; on the other, the sim-
ilarity in their methods.

Adam Smith, as we saw, holds that the landowners ulti-
mately pay most of the taxes, bearing as they do all the taxes
on land, and a great part of the taxes on wages and profits.
The/'rich consumers" pay a smaller part, and the lenders
of capital still less. On the other hand, Ricardo maintains
that the landowner pays only the taxes on rent proper, but
shifts all the other taxes on land. Both Ricardo and Adam
Smith agree that wages can never be reached by a tax ; but
Adam Smith regards the landowners, while Ricardo looks
upon the recipients of profits of stock, as the real taxpayers
of the country. The one may be called the unconscious
advocate of the landed interest, the other of the moneyed
interest.

But while they differ in result, they largely agree in
method. What Roscher calls the " magnificent abstractions "
of Ricardo are perhaps the more impressive. In his reason-
ing, no allowance is made for conditions or qualifications.
The law of competition is assumed as perfect in its opera-
tions. The absolute transferability of capital and labor is
presupposed. The most far-reaching hypotheses are posited,

1 " If they could all raise the price of their goods so as to remunerate them-
selves with a profit for the tax : as they are all consumers of each other's com-
modities, it is obvious that the tax could never be paid; for who would be the
contributors if all were compensated ? " On the Principles of Political Economy
and Taxation, p. 303. (McCulloch's ed., p. 135.)

The Absolute Theory 121

in the belief or, at all events, with the resulting belief on
the part of the unwary reader that they are exemplifica-
tions of actual facts. Everything is reduced to its simplest
form. The complicated questions of industrial society are
treated as more or less plain arithmetical problems. Even
though Ricardo's fundamental theory of distribution were
correct, his doctrine of incidence would thus be incomplete.
It might, perhaps, be true so far as it went, but it would even
then not go far enough to explain actual phenomena. It
fails to notice the practical effects of economic friction.
However much we may marvel at his power of analysis, we
instinctively regard his conclusions with some suspicion.
Ricardo's doctrine of incidence is in some respects prema-
ture and inadequate. Because of its rigidity and unyielding
abstraction, it may be called far excellence the absolute
theory.

CHAPTER III

THE EQUAL-DIFFUSION THEORY

THE germ of this doctrine can be found in the work of a
renowned Italian economist of the eighteenth century, Verri.
He lays down the general principle that every tax naturally
tends to bring about an equilibrium because it strikes every
one according to his consumption. 1 If the tax is levied on
land, the prices of agricultural products will rise ; if on wares
and manufactured commodities, the merchants and artisans
will demand more ; if on the working classes, they will
necessarily exact higher wages. Thus taxes always have an
expansive force; they tend to seek a level in a continually
larger sphere. From this point of view it would appear to
make no difference whether taxes were imposed on one class
or on another. 2

But, after proving to his satisfaction, in detail, that taxes
tend " to diffuse and to equalize themselves on consumption " 3
Verri maintains that this ostensible law of indifference is not
really defensible. For this equalization of the burden of taxa-
tion always involves a continual struggle a state of war
or, as he puts it in another place, a condition of revolu-

1 " Ogni tribute naturalmente tende a livellarsi uniformemente su tutti gl' indi-
vidui di uno stato a proporzione delle consumazioni di ciascuno." Meditazione
sulla Economia Politico,. Di Pietro Verri Milanese. 1771, p. xxx. Cf. Custodi's
Collection of Scrittori Classici^Italiani di Economia Politico,, Parte Moderna,
tomo xv, p. 244. Milan, 1804.

2 " Cosi il tribute ha sempre una forza espansiva per cui tende a livellarsi sulla
sfera piu vasta che si puo. Riguardato da questo canto solo, parebbe indifferente
che ei cadesse piu su di una classe d' uomini che su di un' altra." Ibid., p. 247.

8 "Chi piu consuma piu contribuisce al tributo; e il tribute, siccome dissi, si
diffonde e conguaglia sulle consumazioni." Ibid., p. 253.

122

The Equal-diffusion Theory 123

tion, between individuals and classes. 1 When the tax is
imposed in first instance on the rich and powerful, they can
easily shift it to the poor and weak; but when the tax is
assessed directly on the weak, the shifting and equalization
will take place slowly and with all those delays and obstacles
which occur when the poor try to get justice from the rich.
These intervals, Verri concludes, between the impulse and
the final repose form the most important crisis in national
life, and are especially to be borne in mind in considering
each transfer of taxation. 2 Verri accordingly is a strong
advocate of the exemption of the poorer classes from taxation.
A few years even before Verri, the idea was advanced by
an Englishman, Lord Mansfield. "I hold it to be true,"
said Mansfield, " that a tax laid in any place is like a pebble
falling into and making a circle in a lake, till one circle
produces and gives motion to another, and the whole circum-
ference is agitated from the centre." 3 Mansfield, however,
made no further application of the doctrine. Several years
later, Dickson 4 described the process of the shifting of taxes,
which he thought would result in a situation where all per-
sons concerned would finally bear a just proportion of the
increase of price due to the tax. 5

1 " Questo conguaglio e questa suddivisione del tribute e sempre uno stato di
guerra fra ceto e ceto d' uomini." " II tempo che trascorre fra la imposizione del
tribute e il conguaglio, e un tempo di guerra e di rivoluzione." Ibid., pp.

253. 254.

2 " Quando il possessore e il cittadino che ha fondi debbono anticipare il tribute,
la suddivisione nel minuto popolo si fa sollecitamente e con poco ostacolo, perche
egli e il potente che richiede ragione dal debole; ma quando il tributo imme-
diatement cada di primo slancio sulla classe del debole, la suddivisione si fara, ma
con quella lentezza o con quegli ostacoli che debbon nascere quando il debole e
povero cerca ragione dal ricco e potente. Questi intervalli fra 1' impulso e la
quiete sono le crisi piu important! negli stati, e sono ben da osservarsi in ogni
cambiamento di tributo." Ibid., p. 254.

3 "Speech on Taxing the Colonies," 1766.- In Lord Mansfield's Collected
Speeches. Quoted by F. A. Walker, The Wages Question, p. 316.

4 An Essay on the Causes of the Present High Price of Provisions as connected
with Luxury, Currency, Taxes, and National Debt. [By Adam Dickson.] Lon-
don, 1773.

5 "In the payment of taxes, no man is a patriot; every person endeavors to

124 Shifting and Incidence of Taxation

Another English writer of about the same date thought
that a tax inevitably tends to raise the prices of all commodi-
ties, including those not taxed ; l " for taxes, like the various
streams which form a general inundation, by whatever chan-
nels they separately find admission, unite at last and over-
whelm the whole." 2 Every one, therefore, really bears a
part of the burden, even if the tax is not imposed upon him.
In still another work, written toward the end of the eigh-
teenth century by John Young, the same idea is expressed
somewhat more fully. 3 Young maintains that taxes not only

evade them, or to oblige others to reimburse him for what he pays. The first can
only be done in a small degree, the last is the method commonly taken. When a
tax is laid upon any manufacture, the manufacturer, in order to carry on trade to
the same extent as formerly, must either borrow money for which he must pay
interest, or he must purchase at a longer credit, which, with respect to his sell-
ing, is the same thing with purchasing at a higher price. He must, therefore, lay
upon the commodities which he sells the interest of the money which he borrows,
or the additional price which he pays for the materials which he manufactures.
Besides this, he lays upon the price of these commodities the whole tax which he
pays. This at least with all his address he endeavors to do. The persons that
consume the commodities which he manufactures, finding the prices of these
raised, instead of retrenching, which is commonly a disagreeable thing, endeavor
in their turn to raise the prices of the commodities in which they deal. Thus, if
the tax makes a very considerable difference, the prices are raised in a rotation,
and at last come to the manufacturer where the rise began, who, in consequence
of this, if in his power, begins another rise, which every person will endeavor to
push around in the same manner, so that a heavy tax naturally raises the prices of
commodities gradually, till such time as they are fixed in such a state as to make
all persons concerned bear a just proportion of it." An Essay, pp. 66-67. [By
Adam Dickson.] London, 1773.

1 " Besides this, every new tax does not only affect the price of the commodity
on which it is laid, but that of all others, whether taxed or not, and with which,
at first sight, it seems to have no manner of connection. Thus, for instance, a tax
on candles must raise the price of a coat, or a pair of breeches; because, out of
these, all the taxes on the candles of the wool-comber, weaver, and the tailor,
must be paid: A duty upon ale must raise the price of shoes; because from them
all the taxes upon ale drank by the tanner, leather-dresser, and shoe-maker,
which is not a little, must be refunded." Thoughts on the Causes and Conse-
quences of the Present High Price of Provisions. London, 1767, pp. 4, 5.

2 Ibid., p. 5.

3 Essays on the following Interesting Subjects : viz., I Government, II Revo-
lution, etc., etc., VII Taxation, and VIII The Present War. By John Young,
D.D. Glasgow, 4th ed., 1794.

The Equal-diffusion Theory 125

raise the price of the commodities taxed, but tend to lower
the value of money, and thus to raise the prices of all other
commodities. Ultimately, says he, they also increase wages.
But laborers, providing they are willing to live on the prod-
uce of the country and be clad as their fathers were, in their
own manufacture, "pay practically nothing to government
and yet get higher wages." "Thus it appears," observes
Young, " that though taxes newly imposed must be burden-
some ; because they take from the people so much of what
was formerly their own ; yet the longer they continue, they
become the lighter : and, in process of time, they cease to be
a burden at all." 1 " This may be thought a bold assertion,"
adds Young, "but it is capable of demonstration." 2

Verri, as well as the English writers, however, seem to
have passed unnoticed. The theory in its modern form really
dates back to the celebrated book of Canard, 3 which has now
become so rare as to justify a somewhat fuller treatment.

Canard expounds his views in a work avowedly written to
disprove the Physiocratic theory of incidence. According to
him, there is not only a natural labor, that is, labor neces-
sary to sustain existence, but also what he calls acquired
labor, as well as superfluous labor. These three kinds of
labor lay the foundation of all surpluses or rents. There are,
therefore, three rents : rente fonciere, the result of the fixed
labor applied to land or industry ; rente industrielle, the re-
sult of the travail appris in industry ; and rente mobiliere, the
result of the travail superflu in commerce. The aim of every
man is to turn his labor into that particular kind of occupa-
tion which will give him the greatest rent or surplus. From
this mutual struggle results the system of "equilibrium of
advantages," the laws of which are the explanation of all
economic phenomena. 4 The balance or equilibrium of these
three rents is the foundation of the law of incidence.

1 Ibid., p. 128. 2 ffid., p. 125.

3 Principes d" 1 Economic Politique. Ouvrage couronne par I'Institut National.
Par N. F. Canard. Paris, an X (1801).

4 "L'equilibre des rentes." Ibid., pp. 10-12.

126 Shifting and Incidence of Taxation

All taxes, he continues, must be paid from one of these
three rents, since a tax can never remain on the travail natu-
rel which is necessary to existence. All taxes, again, are
shifted because they disturb the equilibrium between the
rents. Hence it makes no difference how a tax is imposed,
whether on rent or on consumption. The incidence will al-
ways be the same ; for a tax always diminishes the desire or
| " determination " of the buyer and seller, and no sale will take
1 place until these desires are equalized by each party assum-
ing one-half of the tax. This is the "equilibrium of the
determination " to exchange. The first step in the shifting
of taxes is then like this : *

i\ T is share of first seller.
( \ T is share of second seller.

- -/- * T i T is share of third seller .

Share of second buyer is . 4 T , T is share of fourth seller .

Share of third buyer is . . . ^ \ T j

Share of fourth buyer is .... * ^ T, etc.

But this is, of course, only the first step. The first seller
will immediately see that he is bearing one-half of the tax,
while only one-quarter rests on the buyer. He will perceive
that the buyer's "determination" to exchange is stronger
than his, and will, therefore, refuse to sell. But if the buyer
assumes an additional share of the tax, as he well can, he
will for the same reasons shift a part of the tax to the next
seller, and so on. There will be no equilibrium until each
bears an equal share.

To understand how the burden of the tax is distributed be-
tween buyer and seller, Canard likens the system of circula-
tion of goods to a series of communicating tubes. No matter
how much water we pour in or out of any one tube, every
one of the other tubes will gain or lose until the level is
again reached in all. Just as the water will seek its level
by distributing itself proportionally to the diameter of each
tube, so every tax will be distributed equally between buyers

1 Principes d j Economic Politique, p. 158.

The Equal-diffusion Theory 127

and sellers according to their capacity to labor. 1 Hence it is
useless for economists to devise schemes for taxing forms of
business which seem not to be hit by any existing tax. It is,
moreover, utterly futile for the banker or merchant to hide
his books ; for the taxation of any one branch of industry is
like the operation of cupping. The vein from which the
surgeon has taken the blood is not more bloodless after the
operation than any of the other veins of the body. So it is
with the profits of any branch of industry which are dimin-
ished by a tax ; the profits of all other branches flow in at
once, until the equilibrium is restored. 2 It may be said, in
fact, that the burden of the tax finally disappears, and that
the tax is ultimately borne by no one at all. 3

Canard, however, confesses that it takes some time for this
equilibrium to be realized. There will, he admits, be many

1 " Pour concevoir comment 1'impot se repartit sur tous les acheteurs-vendeurs,
imaginons une suite de tubes se communiquant entr'eux; si dans 1'un d'eux on
verse un liquide quelconque, il s'ecoulera successivement dans tous les tubes, et
1'ecoulement cessera lorsqu'il y sera de niveau. Alors le liquide sera reparti dans
tous les tubes proportionellement a leur diametre, de m8me que 1'impot est reparti
sur tous les acheteurs-vendeurs, proportionellement a la capacite de leur travail."
Ibid., p. 161. "Les lois d'equilibre, dans le systeme general de la circulation,
sont les mSmes que les lois de 1'equilibre des fluides." Ibid., p. 233.

2 " C'est done bien vainement que les economistes s'epuisent en moyens pour
chercher a atteindre par 1'impot les branches qui lui paraissent inaccessibles :
1'impot que 1'on percoit sur une branche d'industrie ressemble a la saignee que
le chirurgien fait au bras; la veine qu'il a piquee n'est pas plus appauvrie du sang
apres 1'operation, que toutes les autres parties du corps. II en est de meTne du
gain que 1'impot soutire d'une branche; le gain des autres branches vient tout-a-
coup y affluer pour retablier 1'equilibre." Ibid., pp. 168, 169.

3 " On peut dire, a la rigueur, que la charge de I'impdt finit par Stre tout-a-fait
nulle, et n'est supportee par aucun individu." Ibid., p. 178. In another pas-
sage Canard pictures the process as follows : " Ainsi, voici la marche que suit la
charge de 1'impot : i elle s'ecoule d'abord de celui qui le paie le premier sur
tous les autres acheteurs-vendeurs et consommateurs de la meme branche; 2 de-
la elle se repand de proche en proche sur toutes les autres branches, par la nou-
velle concurrence qu'apportent ceux qui quittent les branches imposees, pour
s'attacher a celles qui ne le sont pas; 3 enfin, cet exces de concurrence va se
perdre dans la branche immense de Peffort politique alimentee par 1'impot, et
dont la consommation dedommage les autres branches de la diminution de la
consommation superflue qui en resulte. Alors la charge de I'imp8t est entiere-
ment de niveau, alors elle n'est plus sentie." Ibid., p. 180.

128 Shifting and Incidence of Taxation

contests between buyers and sellers and many difficulties in
the way. These difficulties he calls the "friction of taxa-
tion." 1 During this period of returning equilibrium, even the
"natural labor," or the wages of the ordinary laborer, may be
affected by the tax. Moreover, this period of friction pro-
duces serious fluctuations, which throw all business into
confusion until the equilibrium is again reached. It is not
so much the tax which causes the trouble, as the derange-
ment of the equilibrium. Hence, concludes Canard, we may
advance this great truth : " Every old tax is good, every new
tax is bad." 2 A government which does not possess a fixed,
invariable system of taxation is like the planter who is con-
tinually changing his methods, but whose land, in the mean-
time, produces nothing, until the owner himself is ruined. 3
Every tax becomes good, provided it lasts long enough. 4
Curiously enough, Canard's practical solution of the problem
is found in the proposal to replace all existing taxes by a tax
on salt.

The theory of Canard was accepted by several writers,
notably by Courcelle-Seneuil and Cherbuliez in France, and
by Prittwitz in Germany. Courcelle-Seneuil tells us that old
taxes act exactly like climatic or agricultural disadvantages.
Society is poorer, says he, than it would be if these dis-
advantages did not exist, but the disadvantages are spread
over the whole community. 5 Cherbuliez expresses the same

1 " Cette difficulte, c'est ce que j'appellerai le frottement de Pimpot." Prin-
cipes d'conomie Politique, p. 181.

2 " On voit done que ce n'est pas 1'impot par lui me"me qui fait le mal, mais
seulement le derangement de 1'equilibre qu'il cause. Done on peut avancer cette
grande verite, que tout vieil impbt est bon, et tout nouvel impot est mauvais"
Ibid., p. 197-

3 " Un gouvernement qui n'a pas une maniere fixe et invariable d'impositions,
ressemble a un proprietaire qui, apres avoir fait une plantation, s'en degoute, la
change pour une autre, et celle-ci pour une autre encore; pendant ce temps
la terre ne produit rien, et le proprietaire se mine." Ibid., p. 198.

4 " Tout impot ne devient bon que par sa vetuste." Ibid., p. 233. Cf. p. 202.

5 " Lorsque les impots ont re^u la sanction du temps, ils ne touchent plus a la
propriete d'aucun individu en particulier, parceque chacun a arrange sa vie en
vue de son existence. Ils agissent alors exactement comme les inconvenients du

The Equal-diffusion Theory 129

idea, but in somewhat modified form, in saying that stability
is the best quality of a tax system, as mobility is the worst.
All taxes, he argues, no matter how bad at first, gradually
become good. 1

The theory reached its final stage in the German writer
Prittwitz, who maintained that the only way to secure a just
and equitable distribution of taxes was through a permanent,
immutable system, and that this would be equally true, even
though the system were at its inception the most absurd and
burdensome one imaginable. 2 It is for this reason that the
theory may be called the " optimistic " theory.

The writer who may be said to share with Canard the
doubtful honor of founding the optimistic theory is Thiers.
He wrote quite independently of Canard, and is of especial
importance as being the inventor of the term " diffusion " of
taxes a term which he borrows from the science of optics.
He compares the shifting of taxes to the diffusion of the rays
of light, and lays down his principle in the following words :
" Taxes are shifted indefinitely, and tend to become a part of
the prices of commodities, to such an extent that every one
bears his share, not in proportion to what he pays to the
state, but in proportion to what he consumes." 3 The argu-

climat et du sol : la societe en general est moins riche que si ces inconvenients
n'existaient pas; mais cette diminution de richesse se trouve repartie de telle
facon que toutes les forces mecaniques sont dans leur equilibre naturel." Traite
th'eorique et pratique d* Economic Politique. Par J. C. Courcelle-Seneuil. Paris,
1857. 2d ed., 1867, i, p. 462.

1 " La stabilite est le merite le plus essentiel, la mobilite le plus grave defaut
que puisse avoir un regime pratique de fiscalite. Tout systeme d'impots, quelque
vicieux qu'il puisse Stre en theorie, au point de vue de la repartition, va s'ameliorant
en pratique avec les annees, a mesure que les effets immediats du prelevement
sont amortis et successivement effaces par 1' action toujours graduelle, souvent tres
lente, mais invariable et certaine, des lois qui gouvernent la vie economique des
societes." Precis de la Science Economique et de ses principales Applications.
Par A.-E. Cherbuliez. Paris, 1862, ii, p. 457.

2 " Denkbar abenteuerlichste und driickendste " are the words. Cf. Die Kunst
reich zu werden, oder gemeinfaszliche Darstellung der Volkswirthschaft. Von M.
v. Prittwitz. Mannheim, 1840, pp. 515-522 ; and the same writer's Theorie der
Steuern und Zolle, Stuttgart, 1842, pp. 107-116.

3 " L'impot se repartit a 1'infini, et tend a se confondre avec le prix des choses,

K

130 Shifting and Incidence of Taxation

ments with which Thiers supports this thesis are as follows :
The manufacturer who pays a tax, whether direct or indirect,
adds the tax to the price of the commodity ; for, consciously
or not, he necessarily fixes the price so as to recompense him
for all his outlays, plus a certain profit. Otherwise he would
quit the business. The tax, then, is simply a part of the cost
of production. This is true not only of the manufacturer,
but of the farmer. If he is to remain in the occupation of
agriculture, all his outlays must be made good. So, again,
the laborer is in precisely the same situation ; for unless his
wages increase by the amount of the tax, he must change his
occupation or die of hunger. Thus all taxes are indefinitely
shifted.

When we remember that Thiers' whole work was written
to prove the absolute rights of private property, we need not
feel surprised at his conclusions. He tells us that, according
to this most wise and reassuring law of providence, no mat-
ter what the government may do, it is always the rich who
pay most of the taxes, because they consume the most. 1 To
the socialists, he says : Hands off, do you not see that the
rich already pay most of the taxes ? To the radicals, who
wish to restrict the province of indirect taxes because they
bear heavily on the poor, he says: Stop, that is not true; the
rich already pay more than their share.

The logical conclusion of what Thiers calls this "rigor-
ously true " theory of incidence would undoubtedly be that
it makes no difference what system of taxation is adopted.
But, "God forbid that I should maintain such a heresy," 2
cries Thiers, much to our surprise. He demands, in the first

au point que chacun en supporte sa part, non en raison de ce qu'il paye a 1'Etat,
mais en raison de ce qu'il consomme." De la Propriete. Par M. A. Thiers.
Paris, 1848, p. 381. Cf. "L'impot se repercute a 1'infini, et de repercussions en
repercussions devient en definitive partie integrante du prix des choses. C'est ce
qui j'appelle la diffusion de I'impSt." Ibid., p. 382.

1 " Par une loi des plus sages, des plus rassurantes de la Providence, de
quelque fagon que s'y prennent les gouvernements, le riche est apres tout le plus
soumis a I > imp8t." Ibid., p. 389.

2 "Dieu me preserve de soutenir une pareille heresie."

The Equal-diffusion Theory 131

place, equality of taxation, without attempting, however, to
show in what this equality consists. Secondly, he makes the
important concession that, although the tax is ultimately
shifted, it is, for the time being, a burden on the first payer.
But he at once complacently ignores these concessions and
maintains that, in the long run, regardless of any act of the
government, it is always the rich who pay the taxes.

It is to be noticed that this rather shallow doctrine of
Thiers met with almost no success in France, where de
Broglie is almost the only writer who has adopted it, in
speaking of the "indefinite repercussion" of taxes. 1 It
is remarkable, however, that it should have found adherents
in other countries. The most noteworthy modern follower
of Thiers is the Austrian professor, Stein, who goes so far
as to declare the whole doctrine of shifting to be the result
of a " marvellous confusion of thought." According to
Stein, every tax is shifted by everybody on everybody,
since everybody merely advances the tax for somebody else
who uses his productions. From this theory logically fol-
lows that there is no need of a science of taxation. In place
of the "confused doctrine" of the shifting of taxes, Stein
propounded the "simple idea of the production of taxes," the
idea that " the total amount of all taxes must be really pro-
duced every year as the surplus of production." 2

Although this conception may be very " simple " to Stein,
it must be confessed that even all subsequent German writers

1 "Tout impot tombe, en derniere analyse, sur le consommateur; tout imp8t
entre, comme element integrant, dans le prix des choses consommables." Le
Libre ^.change et V Impot. Etudes & Economic Politique. Par le Due de Broglie.
New ed. Paris, 1885, p. 48. The passage originally appeared in his monograph,
Les Impbts et les Emprunts, published in 1849.

2 Lehrbuch der Finanzwissenschaft. Von Dr. Lorenz von Stein. 4th ed.
Leipzig, 1878, i, pp. 493-497: "Die Lehre von der Uberwalzung der Steuern
ist eine der wunderlichsten Begriffsverwirrungen, die es je in der Wissenschaft
gegeben hat. . . . Das grosse Resultat ist das jede Steuer von jedem auf jeden
Uberwalzt wird. . . . An die Stelle der unklaren Ueberwalzung der Steuern
tritt der klare Begriff der Production derselben. . . . Die Gesammtsumme aller
Steuern muss alljahrlich als Mehrwerth der Production von dem Volke wirklich
producirt werden. . . . Das ist der einfache Begriff der Steuerproduction."

OF THE
TT-KTTXr-p.T? QTTT

132 Shifting and Incidence of Taxation

have declared themselves unable to understand what it means.
We may, therefore, be excused from attempting to unravel
the mystery.

In England, we find during the nineteenth century com-
paratively few allusions to the theory. Martin summed up
the doctrine in the following words : " The public are the
persons on whom the taxes fall, no matter how they may be
artfully diverged in their course." 1 A few years later an
anonymous writer devoted a volume to an attempt to prove
that all taxes whatsoever finally fall upon the consumer. 2
This writer was evidently Gibbon, for in a subsequent work
he treats the subject in much the same way, and states the
equal-diffusion theory in almost the same words by saying
that "all taxes, direct or indirect, paid by the producers or
importers of commodities, and by the dealers therein,
ultimately fall upon, and are paid by, the consumers, by
whomsoever such taxes may have been paid to the col-
lectors thereof, or into the public chest." 3 Gibbon applied
this rule to practically all taxes, for, according to him,
taxes on land are taxes on the produce of the land, and,

The most recent attempts to understand, and at the same time to combat, Stein
are found in the two Dutch works : Cort van der Linden, Leerboek der Financi'en,
1887, 81, pp. 156-162; and Pierson, Leerboek der Staathuishoudkunde, 1890,
ii, pp. 448-455.

1 Taxation of the British Empire. By R. Montgomery Martin. London,
1833, p. 245.

2 "All taxes, direct and indirect, paid by owners or occupiers of land; and all
taxes paid by the dealers in the productions of land, on their way from the
producer to the consumer and all taxes whatsoever, paid by producers within
the United Kingdom, and by importers of all commodities for home consumption,
and by the dealers in all such commodities, on their way from such producer or
importer to the consumer as well as all taxes of Customs or of Excise imposed
on such productions or commodities, by their measure or weight, ultimately fall
upon and are paid by the consumers of those productions or commodities, by
whomsoever such taxes may have been paid to the collectors thereof, or into the
public chests." A Familiar Treatise on Taxation, Free Trade, etc., compris-
ing Facts usually unnoticed or unconsidered in Theories of those Subjects. London,
1846, p. 21. Cf. p. 46.

8 Taxation : its Nature and Properties, with Remarks on the Incidence and
the Expediency of the Repeal of the Income Tax. By Alexander Gibbon, Esq.
London, 1851, p. 18.

The Equal-diffusion Theory 133

like taxes on profits or income taxes, fall in the end on the
consumers." 1

In America, the few writers of prominence on the sub-
ject of taxation were, until recently, almost all followers of
Thiers. America may, in fact, claim the honor of being the
only country in the world where the doctrine is still upheld.
The chief representative of this easy-going, complacent doc-
trine is David A. Wells. "Taxes equate and diffuse them-
selves," says he, "and if levied with certainty and uniformity
they will, by a diffusion and repercussion, reach and burden
all property with unerring certainty and equality. All taxa-
tion ultimately and necessarily falls on consumption. 2 The
same opinion has been advanced by Isaac Sherman in the
statement that "all proportional contributions to the state
from direct competitors are diffused upon things and persons
by a uniformity as manifest as is the pressure of water which
is known to be uniform in all directions." 3 Even Judge
Cooley is not entirely free from a share in this opinion. 4

President Walker was the first American economist to
question the truth of the optimistic theory. 5 He seems, how-
ever, to overlook the fact that this is only one among many
theories of incidence, and that the problem of shifting cannot
be solved simply by a negation of the equal-diffusion doc-
trine. It may also be mentioned that Alexander Hamilton,
at the end of the eighteenth century, made an incidental
allusion to the equal-diffusion theory, although the term

1 Ibid., pp. 19, 26, 33.

2 Article " Taxation " in Lalor's Cyclopaedia of Political Science, iii, p. 88. The
editor of this cyclopaedia makes the remarkable statement : " Mr. Wells' views are
in harmony with those of Adam Smith, Ricardo, James Mill, Thiers, McCulloch
and Say." A most remarkable jumble ! Cf. another statement of Mr. Wells'
theory in the Second Report of the New York Tax Commission, 1872, p. 47,
where he quotes Thiers approvingly.

3 The Exclusive Taxation of Real Estate and the Franchises of a Few Speci-
fied Moneyed Corporations. By Isaac Sherman. New York, 1874.

4 A Treatise on the Law of Taxation. By Thomas M. Cooley. Chicago, 1881,
2d ed., 1886, p. 38.

5 Political Economy. By Francis A. Walker. 3d ed. New York, 1 888,
606-610.

134 Shifting and Incidence of Taxation

was, of course, not employed by him. Hamilton, however,
was too great a statesman to be deluded by the specious ad-
vantages of a system of taxation based on this theory. He
was careful to point out that the important thing is to dis-
tribute the burdens equitably at first, and not to rely upon the
supposed automatic working of any such general principle. 1

The optimistic theory is so superficial that it scarcely
deserves a refutation. The doctrine has never been accepted
by any writers of importance, except the few already men-
tioned ; and the weakness in the arguments advanced to sup-
port it has been shown a hundred times. It is needless to
repeat these arguments here, as our review of the eclectic
theories, as well as the whole positive and constructive part
of the present monograph, will show the shallowness of the
doctrine. Were the theory true, there would be no need for
any investigation like the present.

What may be called the pessimistic theory is, like the
optimistic theory, also based on the doctrine of diffusion ; but
it draws entirely different conclusions. Its chief apostle is
the great anarchist, Proudhon. According to him, all taxes
are, in last resort, taxes on the consumer. Try as the legislator
may, he cannot prevent this shifting. The whole distinction
between direct and indirect taxes, he concludes, is useless;
and the result of such attempt at classification must always be
"fiscal nonsense." 2 Since the mass of the consumers are
poor, says he, all taxes are unjust, because they inevitably

1 " Though it may be said that on the principle of a reciprocal influence of
prices, whereon the taxes are laid in first instance, they will in the end be borne
by all classes, yet it is of the greatest importance that no one should sink under
the immediate pressure. The great art is to distribute the public burthens well,
and not suffer them, either first or last, to fall too heavily on parts of the commu-
nity, else distress and disorder must ensue ; a shock given to any part of a political
machine vibrates through the whole." The Continentalist, No. 6, 1782. ( Works
of Alexander Hamilton, edited by Henry Cabot Lodge, i, p. 265.)

2 " En resume, de quelque maniere qu'on s'y prenne avec I'impot, on obtient
zero de resultat. Cest toujours la consommation qui le paye." ... " Voici qui
met le comble a la deraison fiscale. En derniere analyse, I'impot est acquitte par la
masse." Th'eorie de CImp&t. Par P. J. Proudhon. Paris, 1861. In new edi-
tion, (Euvres Completes. Paris, 1868, vol. xv, pp. 206, 166.

The Equal-diffusion Theory 135

press on the poor more than on the rich. This fact consti-
tutes the inevitable iniquity of taxation : a taxation is necessary,
and yet it is necessarily unjust. This is one of Proudhon's
famous "contradictions economiques." "The problem of
taxation is hence insoluble. The fault lies neither with the
principle of proportion, nor with the revolution, nor with the
government ; neither with ideas nor with men ; the fault is to
be found in the institutions, which themselves depend on the
nature of things."

Proudhon's pessimism is as superficial as Thiers' optimism.
Each contents itself with words instead of arguments. Yet,
however widely they diverge in practical results, the theories
virtually agree in asserting that it really makes no difference
what sort of taxes are imposed. In the light of such theories
as these, the whole science of finance appears to be a need-
less product of jugglery and mystification.

A recent American writer, Albert S. Bolles, may also be
regarded as an advocate of the pessimistic theory, although
he would probably resent any statement that he had been
influenced by Proudhon. In fact, he bases his pessimism on
the uncertainty of the process of shifting. According to
Mr. Bolles, "no uniform law or rule prevails or can possibly
be established with respect to the transfer (of taxes.)." . . .
" A tax which is fairly assessed on all property in the begin-
ning proves a highly unjust tax in its operation. . . . Some
are obliged to bear the whole burden, they can shift no part
of it; others are more fortunate and shift a portion ; others
are engaged in such a business, or happily are owners of
such property, that they can shift the whole, or nearly the
whole burden." The whole system thus results in the
greatest inequalities. 2

1 " L'iniquite de 1'impot ne vient done pas de lui, elle a son principe dans ces
transformations engrenees, dans cette oscillation universelle, dans ces inegalites
organiques, qui sans cesse, par leur agitation incoercible, rejettent sur le produit,
et consequemment sur la masse des consommations, ce que 1'impot s'etait efforce
de repartir entre les proprietes, les maisons, les industries, les capitaux, les loyers,
etc." 7&V.,p. 222.

2 Report of A. S. Bolles in Report of the Revenue Commission appointed by

136 Shifting and Incidence of Taxation

It is true that Mr. Bolles applies his doctrine only to the
general property tax. But the reasoning is equally appli-
cable to other taxes ; for in the matter of incidence there is
very little difference, as we shall see, between a tax on
property and one on profits. Almost all taxes may be con-
sidered, in one sense, taxes on profits. If it were true that a
uniform tax always results in gross inequalities, the outlook
for just taxation would indeed be poor. But, as will appear,
it is an exaggeration to say that "uniform rules cannot be
established." Pessimism we shall find to be as untenable as
optimism.

the Act of the Legislature of Pennsylvania, May 25, 1889. Philadelphia, 1890,
p. 142.

CHAPTER IV
THE CAPITALIZATION OR AMORTIZATION THEORY

THE origin of this theory is connected with the discussion
of the land tax. To the extent that a land tax falls exclu-
sively on the landowner, it was observed that the effect is to
lower the value of the land by the capitalized value of the
tax. In other words, since the value of land is fixed by its
net produce, a tax which operates to decrease this net prod-
uce diminishes the value of the land by an amount equal to
the capitalized value of the tax. The individual who pur-
chases such land will pay for it only this diminished value.
He will therefore be free of taxes, since he has discounted
the tax by paying a smaller price for the land. The tax, in
short, becomes a perpetual rent charge, allowance for which
is made in any transfer of the property. From this argument
the conclusion is drawn that a tax on land, after its first
imposition, is borne by no one, since it is paid once and for
all, and is then immediately shifted off in a capitalization of
the tax. It is therefore entirely immaterial how low or how
high the rate is, provided it be constant. This is known
as the capitalization or amortization theory, according as we
look to the increase or the diminution of the capital value.
Applied especially to land, it is also known as the rent-charge
theory, because the taxes are assumed to cease to be taxes on
the owner, and to become rent charges in favor of the state.

The germ of this doctrine may be found in the work of
some of the English writers of the eighteenth century. As
far back as 1733, a pamphleteer of the excise controversy
made an incidental allusion to the point. Speaking of the
effect of a land tax, he says : " As for those who are late

'37

138 Shifting and Incidence of Taxation

Purchasers, they have little Reason to complain, since they
came in upon the Foot of the Tax, and have often had
Allowance made them for it in the Purchase." 1 The author,
however, draws no conclusions from this principle. At a
considerably later period, John Young developed the same
point independently in an interesting passage intended to
reenf orce his general argument 2 that the weight of taxes is
not so burdensome as is generally believed. Young main-
tained that when a man bought a piece of land subject to a
land tax, what he really purchased was the value of the land
less the capitalized value of the tax, which belonged not to
him, but to the government. 3

The writers of the Physiocratic school in France, espe-
cially Turgot and Baudeau, also called attention to this phe-
nomenon. 4 But the theory was without much influence until
after the beginning of the nineteenth century.

The earliest of the nineteenth century writers to discuss
this problem, and in some respects the most interesting, was
John Craig. This author, who has hitherto been singularly
neglected, is worthy of notice as, until very recently, the only
English writer to devote a separate volume to questions of
public finance. He makes use of the argument advanced

1 The Nature of the Present Excise, and the Consequences of its Farther Ex-
tension examined. In a Letter to a Member of Parliament. London, 1 733, p. 38.

2 See above, p. 125.

3 " Let the land tax be an instance. Suppose it fixed at a real two shillings in
the pound, and rendered permanent. In that case, when a man buys an estate
he knows what it must pay to Government; he buys it with that burden upon
it, and the price is diminished accordingly. It is plain that if it is worth twenty-
seven years' purchase with that burden, it would be worth thirty without it. One-
tenth of every estate really belongs to Government; this he does not purchase,
but only the nine parts that belonged to the former proprietor. The same is the
case with him that succeeds to it as his father's heir. He is heir only to the nine
parts that were his father's; Government is not dead, and therefore continues to
inherit its own tenth part. The only burden, therefore, that lies upon the pro-
prietor of the estate is that of gathering in the two shillings of yearly rent that
belongs to Government, along with his own eighteen, and paying it in to the
collector of the land tax." Essays on the Following Interesting Subjects, etc.
By John Young, D.D. 4th ed., Glasgow, 1794, p. 125. See above, p. 124.

4 See above, pp. 106, 107.

The Capitalization ' l^ieory 1 39

above, and tells us that the tax is " altogether paid by the
present proprietors to the entire exemption of future pur-
chasers." 1 But he limits the statement with an important
condition, to be discussed in a moment, inattention to which
has led succeeding authors to somewhat absurd results.

Some of the early German writers on public finance, such
as Sartorius, Hoffmann and Murhard, went so far as to de-
clare that, because of this capitalization, a land tax is no tax
at^all. Since it acts as a rent charge capitalized in the de-
creased value of the land, 2 they argue, a land tax involves a
confiscation of the property of the original owner. On the
other hand, since the future possessors would otherwise go
_scot_free, it becomes necessary to levy some other kind of a
tax on them. 3

In France we find the theory expressed in part by J.-B.
Say, although he does not draw the same conclusions. 4 The

1 " As the free rent of land will be diminished by the tax, the price of each
estate will proportionally decline. If the nett rent be reduced by a tax of 4 sh.
in the pound, from ,100 to j8o a year, the estate which was formerly worth
^3,000 will no longer sell for more than ^2,400. A proprietor therefore, who
wishes to dispose of his land, will at once be deprived of one-fifth of his property.
Instead of paying 20 a year during his possession, and leaving this annual pay-
ment as a burden on the lands, he finds himself obliged to pay 600 the value of
the tax forever, while his successor is exempted from all contribution." Elements
of Political Science. By John Craig, Esq. Edinburgh, 1814, vol. iii, p. 38.

2 The Germans call the rent-charge theory " Die Reallast-theorie der Grund-
steuer."

3 " Alle und jede fixirte Grundsteuern miissen sonach im Fortgange der Zeit
und im Verkehre mit Grundstiicken die Natur der Steuern ganzlich verlieren und
sich in Staatsrenten verwandlen." Theorie und Politik der Besteuerung. Von
Dr. Karl Murhard. Gottingen, 1834, p. 295. Cf. p. 327. For the necessity of
laying new taxes on future holders see ibid., p. 366. Cf. similar passages in Die
Lehre von den Steuern als Anleitung zu griindlichen Urtheilen iiber das Steuer-
ivescn. Vorgetragen von J. G. Hoffmann. Berlin, 1840, p. no. See also Ueber
die gleiche Besteuerung des Konigsreichs Hanover. Von Georg Friedrich Sar-
torius. Gottingen, 1815, p. 92. See also Theorie der Steuern und Zolle.
Von Moriz v. Prittwitz. Stuttgart, 1842, p. 132.

4 Traite d* Economic Politique ou simple Exposition de la Manure dont se
forwent, se distribuent et se consomment les Richesses. Par Jean-Baptiste Say.
Paris, 1802, book iii, chap, x; 8th ed., 1876, p. 565 : " Le proprietaire ne peut,
meme par la vente de son fonds, se soustraire au fardeau de 1'impot : car le fonds
n'est paye en principal qu'en proportion de ce que 1'impot lui laisse valoir en

140 Shifting and Incidence of Taxation

doctrine is most clearly expounded, however, in the work of
Destutt de Tracy, who makes the " singular and important
observation " that when a tax is laid on land, a value equal to
the capital of the tax is at once taken from the actual propri-
etors, and that when all have changed owners, it is really no
longer paid by any one. It is worthy of note that Tracy
applies his doctrine, also, to taxes on houses and on annui-
ties. 1 Several decades later the capitalization theory was
most elaborately defended by Passy, who has often, but
erroneously, been deemed the real founder of the doctrine.
Since his time the doctrine has generally been known in
France as the theory of the immutability of the land tax
(Thtorie de la fixitt de rimpof). Passy drew the logical con-
clusion that the rate of the tax ought never to be changed.
To increase it would be to confiscate the property; to reduce
it would be to make a free gift of the capitalized value of the
tax to the landowner. 2 The theory has been accepted by
several other French economists. Thus, Gamier maintains
that a tax on land is really an expropriation of the original

revenu. . . . C^est comme si le gouvernement prenait un cinquieme de la terre."
In a work subsequently published by Craig, Remarks on Some Fundamental
Doctrines in Political Economy, Edinburgh, 1821, he calls attention to the fact
that Say entertained many of his views on taxation, although neither had seen the
work of the other.

1 Elements d' Ideologic. Par Comte A. L. C. Destutt de Tracy. Paris, 1804*
This was reprinted in 1823 under the title of Traite d' Economic Politique. Cf.
the American translation by Thomas Jefferson, under the title A Treatise on
Political Economy. By the Count Destutt Tracy. Translated from the unpub-
lished French Original. Georgetown, D.C., 1817, pp. 207-210.

2 " Une remarque essentielle, en ce qui concerne 1'impot territorial, c'est qu'il
finit par ne plus etre constitue 2t titre veritablement onereux pour ceux qui
1'acquittent. Get effet result e des transmissions do.nt la terre est 1'objet. . . . On
ne peut clever le taux de 1'impot sans rivir aux proprietaires non seulement une
portion des revenus dont ils jouissent, mais encore du capital meme du nouveau
tribut annuel mis a leur charge. On ne peut, au contraire, abaisser ce taux sans
leur faire don d'une rente appartenant a 1'etat, et en meme temps du capital de
cette me'me rente." Hippolyte Passy, article " Impot " in Dictionnaire de
VEconomic Politique, Paris, 1852, p. 902. Denis, DImpbt, 1889, 161, errs in
ascribing the origin of the doctrine to Passy. Pantaleoni, Teoria della Trasla-
zione dei Tributi, 1882, p. 173, seems to make the same mistake.

The Capitalization Theory 141

owner, to the manifest advantage of the future proprietors. 1
We find the same ideas in Wolowski, Du Puynode, Cherbu-
liez and Walras. 2 The real weakness of their arguments
has, moreover, not been perceived by subsequent French
writers. Parieu, who was himself not very clear on the gen-
eral subject, shows merely that the doctrine of immutability
necessarily leads to the English idea of the redeemable
rent charge. 3 Even Leroy-Beaulieu, although he terms it
a " remarkably ingenious theory, with all the appearance of
great scientific precision," simply objects that it is " much too
absolute," without going to the pith of the controversy. 4 The
doctrine itself probably attained its extreme form in the
statement of the Austrian economist, Stein, that this ques-
tion is the most important in the whole domain of taxation,
and that the land tax ought never to be increased. 5

In England the .theory has seemed to derive some support
from the fact that the land tax is indeed a redeemable rent

1 " Un impot foncier, quand on 1'etablit, est une sorte d'expropriation du
proprietaire pour une certaine partie de son fonds; mais 1'acheteur qui lui succede
paye la terre en consequence et lie subit plus 1'impot." Les Elements des Finances.
Par Joseph Gamier. Paris, 1858. 4th ed., 1885, under title of Traite de finances,
pp. 100, 103.

2 " Tout accroissement de 1'impot direct sur la propriete ne porte que le nom
d'impot : il est en realite une confiscation partielle deguisee sous une apparence
trompeuse." Wolowski, in the Journal des Economistes, 1866, iv, p. 141. Cf.
De la Monnaie, du Credit, et de rimpbt. Par Gustave du Puynode. Paris,
1853, ii, p. 171. See also Precis de la Science Economique, et de ses Principales
Applications. Par A.-E. Cherbuliez. Paris, 1862, ii, p. 437. See also Elements
d" 1 Economic Politique Pure, ou Theorie de la Richesse Sociale. Par Leon Walras.
3d ed., Lausanne, 1896, pp. 452-454; and the same author's earlier work,
Theorie Critique de VImpbt, 1861, p. 34.

3 " Cette immutabilite n'est meme que la timide premisse de sa rachetabilite."
Traite des Impbts consider es sous le Rapport Historique, Economique et
Politique. Par M. Esquirou de Parieu. Paris, 1862. 2d ed., 1866, i, p. 273.

4 Traite de la Science des Finances. Par Paul Leroy-Beaulieu. Paris, 1876.
5th ed., 1892, i, p. 319.

5 " Im Allgemeinen ist nun kein Zweifel, dass eine solche Erhohung im ganzen
Gebiete der Besteuerung die ernsteste und wichtichste Frage ist welche uberhaupt
hier vorkommen kann . . . Das allgemeine Princip daher muss sein . . . dass
die Grundsteuer niemals erhoht werden darf." Lehrbuch der Finanzwissenschaft.
Von Lorenz von Stein. 4th ed., 1878, ii, p. 55. In the 5th ed., 1886, this passage
is omitted. Cf. ii, pp. 103-105.

142 Shifting and Incidence of Taxation

charge. This, however, is owing to the peculiar circum-
stances of the case. The English land tax, which was origi-
nally a general property tax, came to be considered a fixed
and invariable tax of four shillings in the pound. In 1798 it
was made perpetual at that rate, and the landowners were
given the privilege of redeeming it, that is, to free the land
from taxation by paying a certain lump sum by way of com-
position. In England, therefore, the land tax is a redeem-
able rent charge only because expressly made so by statute.
This is what led Gregg to maintain that the land tax was not
a burden upon the land, because the state had become a
permanent proprietor jointly with the owner of the estate.
It also led Senior to express the same views in distinguishing
between the incidence of a new tax and that of a fixed per-
manent land tax. 1 To draw any general conclusions as to
the incidence of taxation in general from these peculiar
conditions would, however, be inadmissible. The inference
that it is always wrong to impose a new tax or to increase an
old tax on land would be especially unjustifiable. The truth
of the matter is that the whole theory applies to the land tax
only where it is the sole tax levied. Furthermore, it is not
at all peculiar to the land tax.

The truth of the latter part of this statement was already
recognized in the eighteenth century by Young, who con-
tended that the argument as to land taxes is equally applica-
ble to "the house tax, the window tax, and all others that
affect heritable property." 2 A step further, however, was
taken by Craig a fact that seems to have escaped the
attention of succeeding economists; for he expressly tells
us that his theory holds good only in case " a land tax be
imposed without an equivalent duty on every other species
of property." Craig further contends that exclusive taxes in
general, like exclusive taxes on land, fall ultimately on the
present proprietors of that species of property which is

1 Select Committee of the House of Lords on the Land Tax. London, 1846,

qu. 5379-55 I0 -

2 Essays, etc. By John Young. 1794, p. 125. For full title, see above, p. 124.

The Capitalization Theory 143

taxed. 1 John Stuart Mill entertained practically the same
opinion, although he did not work out his theory, but con-
tented himself with asserting that a "peculiar tax on the
income of any class, not balanced by taxes on other classes,
is a violation of justice, and amounts to a partial confisca-
tion." 2

The other English writers have had little to say about the
theory. Dudley Baxter, however, discusses the "strange
theory" of the rent charge, as applied to the land tax, the
poor rate and the succession, probate and legacy duties.
Although he professes to discover three fallacies in the
argument, none of his objections really goes to the root of
the matter. 3 Noble, in his chapter which deals solely with
the broad facts of incidence, mentions the rent-charge theory
only in connection with the land tax. 4 Professor Sidgwick,
who sees that the rent-charge theory applies only to a
special tax on land, restricts the doctrine to " any particular
kind of durable wealth, of which the supply is absolutely
limited." But even he fails to recognize the real scope of
the theory. 5

The only French writer, in addition to Destutt de Tracy,

1 Elements of Political Science, iii, pp. 37, 82-86.

2 Principles of Political Economy, book v, chap, iii, 2. In another pas-
sage he shows that an exclusive tax on " realized property . . . would fall ex-
clusively on those who happened to compose the class when the tax is laid
on. . . . Future buyers would acquire land and securities at a reduction of the
price equivalent to the peculiar tax, which tax they would therefore escape from
paying, while the original possessors would remain burthened with it even after
parting with the property. ... Its imposition would thus be tantamount to the
confiscation for public uses of a percentage of their property." Ibid., book v,
chap, i, 3.

3 The Taxation of the United Kingdom. By R. Dudley Baxter, M.A. Lon-
don, 1869, pp. 50-55.

4 National Finance : A Review of the Policy of the last two Parliaments, and
of the Results of modern fiscal Legislation. By John Noble. London, 1875,
pp. 282. Cf. the same author's The Queen's Taxes: An Inquiry into the
Amount, Incidence, and Economic Results of the Taxation of the United Kingdom.
London, 1870, p. 146.

5 The Principles of Political Economy. By Henry Sidgwick. London, 1883,
p. 569.

144 Shifting and Incidence of Taxation

who attempted to generalize the conception of the capitaliza-
tion of incidence was Cournot. He expounded the theory
at an early period, although in other words. Above all,
Cournot applied it only to articles subject to the law of mo-
nopoly; 1 he drew no general conclusions from the theory.

It was reserved for the German economists to give to the
capitalization theory a more adequate presentation. The
earliest writer to discuss it more fully was Rau, who showed
that the theory was not entirely true of the land tax. In the
first place, says he, the original owners or their heirs often
retain possession, so that there may be no chance for a
diminution of the capital value through purchase and sale.
Secondly, the value of land, he thinks, is fixed not alone by
the net produce, but sometimes by other factors, such as a
change in the demand or in the rate of interest. In such a
case, it cannot be said that the new purchaser does not feel
the tax, because it is difficult for him to realize clearly that he
paid less for the land on account of the tax. So far as the
theory is true, it applies only to so much of the land tax as
exceeds the usual rate of taxes on other commodities. Above
all, he concludes, the same argument is applicable to every
tax levied on objects of varying value capable of sale
whether houses, stocks, bonds, or other capital. 2

Other writers, such as Helferich and Hock, developed the
doctrine, 3 and it has recently been clearly expounded by

1 " On peut meme dire que cet impot [fixed or proportional to net profits] ne fait
tort qu'aux premiers possesseurs, aux inventeurs et en general a ceux qui jouissaient
du fonds productif au moment de 1'etablissement de 1'impot, et a leur successeurs a
titre gratuit. Car les successeurs a titre onereux reglent leur prix d'acquisition sur
le produit net, defalcation faite de 1'impot; et si le fonds vient a e"tre degreve entre
leurs mains, c'est pour eux une veritable epave." Reckerches sur les Principes
Mathematiques de la Theorie des Richesses. Par Augustin Cournot. Paris, 1838,

P- 75-

2 Grundsaize der Finanzwissenschaft. Von Karl Heinrich Rau. Heidelberg,
1832. 5th ed., 1865, ii, pp. 22-27.

3 " Ueber die Einfuhrung einer Kapitalsteuer in Baden." Von Johann A. R.
von Helferich. In Tiibinger Zeitschrift fur die gesammte Staatswissenschaft y
1846, pp. 291 et seq. Cf. Die offentlichen Abgaben und Schulden. Von Dr.
Carl Freiherrn von Hock. Stuttgart, 1863, pp. in et seq.

The Capitalization Theory 145

Schaffle. 1 The latter would naturally be expected to enlarge
the rent-charge doctrine into a general theory of capitali-
zation, because of his doctrine of the universality of the rent
principle the doctrine lately made familiar to English
readers, which asserts that the theory of rent is not confined
to land but is applicable to profits as well. 2 Since ScharHe
emphasized this doctrine, the capitalization theory has been
accepted by Pantaleoni 3 in Italy, and by Pierson 4 in Holland.
But they all fail to notice some of the qualifications which
will be mentioned in the second part of this inquiry. We
have been concerned here merely with the history of the idea.
The doctrine itself, in its modern form, constitutes a part of
the general theory of incidence to be discussed hereafter. 5

1 Schaffle, in the book quoted in the next note, and also in Die Steuern,
Allegemeiner Theil. Leipzig, 1895, 2I2 *

2 Schaffle, Die Grundsdtze der Steuerpolitik und die schwebenden Finanzfragen.
Von Dr. Albert E. Fr. Schaffle. Tubingen, 1880, pp. 176, 187, 190. Schaffle's
general theory of rent and profits was first published in 1867, in his National-
okonomische Theorie der ausschliessenden Absatzverhaltnisse. The theory was
outlined as early as 1855 by Mangoldt in his Die Lehre vom Unternehmergewinn.

3 Pantaleoni, Traslazione dei Tributi, p. 179, chides Schaffle for not giving
credit to Rau. But he seems to forget that Craig preceded both Rau and
Schaffle.

4 Leerboek der Staatshuishoudkunde. Door Mr. N. G. Pierson. Haarlem,
1890, ii, pp. 391-409 : " Amortisatie van Belastingen."

5 See below, part ii, chap, i, sec. I.

. CHAPTER V
THE ECLECTIC THEORY

THE absolute theory, as well as the equal-diffusion theory,
soon met with considerable opposition. Most of the oppo-
nents, however, have confined themselves to criticism and
to the elaboration of a few special points. Their doctrines
may be summed up under the head of the eclectic school.

One of the first who attempted to show the weakness of
both Canard and Ricardo was J.-B. Say. According to him,
a tax on any article, when followed by a rise in price, falls on
the consumer only in part ; for increased price means dimin-
ished consumption, and smaller demand means lower profits.
Thus, even here, he concludes, the producer will bear a part
of the tax. The tax is like the powder that affects both the
ball which it propels and the cannon which it causes to
recoil. 1 Its effects are not felt wholly by the consumer it
never increases price by the full amount of the tax.

When the price of the article does not rise, Say continues,
the producer bears the whole tax. But everything depends
on whether the article is a necessary or a luxury. If the tax
is levied on raw materials, for example, it affects more or less
the prices of all other products. Direct taxes on producers,
in the same way, affect consumers very unequally. As the
doctrine of the transferability of capital is far more true of
circulating than of fixed capital or of land, there is no such
thing as an equality of profits ; and therefore the producers
of some commodities can shift the burden more easily than

1 "C'est 1'effort de la poudre qui agit a la fois sur le boulet qu'elle chasse et sur
le canon qu'elle fait reculer." Traite d'conomie Politique. Par J.-B. Say.
Paris, 1802, book iii, chap, x; 8th ed., 1876, p. 562.

146

The Eclectic Theory 147

others. Moreover, Canard's analogy between the imposition
of taxes and the cupping of the arm is misleading ; for the
wealth of society is not a fluid seeking its own level. It may
rather be likened to a tree, one of whose branches may be
killed without mortally wounding the tree; although the
richer the branch, the greater the danger to the whole tree.
But an analogy, however good, is not a proof. Hence, con-
cludes Say, it is rash to affirm that a particular tax falls
definitely on a certain class. Taxes fall, varying with the
tax or with the state of the market, on those who cannot
escape them; but the methods of escape are numberless.
Nothing is more uncertain, nothing more variable, than the
incidence of taxation. 1 The writers of the abstract school
reason on assumptions to which the every-day facts give
the lie.

On the other hand, Say immediately follows this statement
with the assertion that a landowner can never shift a tax to
the consumers a statement which seems to be quite as ab-
solute as those against which he directs his arguments. The
land tax, he argues, will remain on the landowner, because
the tax cannot normally affect the products ; and, since the
supply does not change, the price cannot. But still, Say con-
cludes, it is impossible to lay down any detailed principles of
incidence. In a machine so complicated as that of society,
taxes are paid in many an elusive form. 2

Another vigorous opponent of Ricardo was Sismondi. Sis-
mondi starts out by asserting that in the case of taxes on arti-

1 " On voit combien il est temeraire d'affirmer comme un principe general que
tout impot tombe definitivement sur telle classe de la societe, ou sur telle autre.
Les impots tombent sur ceux qui ne peuvent pas s'y soustraire . . . mais les
moyens de s'y soustraire varient a 1'infini. . . . Rien n'est plus incertain, rien n'est
plus variable que les proportions suivant lesquelles les diverses classes de la
societe supportent 1'impot." Ibid., p. 566. It is remarkable that Say has usually
been regarded by English and American writers as an exponent of the equal-dif-
fusion theory. In reality, he was one of its chief opponents. President Walker
had already called attention to this fact. See his Political Economy, 3d ed.,
608.

2 " Dans une machine sociale un peu complique'e, 1'impot s'acquitte sous bien des
formes inapersues." Ibid., p. 562, note.

148 Shifting and Incidence of Taxation

cles of consumption, one can never say beforehand by whom
they will be borne, because of the complexity of the conditions
of the market. He discusses the " abstractions " of Ricardo,
and especially his theory of taxes on raw produce and wages.
Sismondi fulminates eloquently against the doctrines of the
absolute equality of wages and of profits, and of the com-
plete transferability of labor and capital the corner-stone of
Ricardo's theory. " What! " asks Sismondi, " are the farmers
to become lawyers, or doctors, or clockmakers because their
wages have been reduced ? Will the laborers with horny
hands and robust bodies all leave their fields and shut them-
selves up in the factories until agricultural wages have again
risen ? Beware of this dangerous theory of equilibrium. Be-
ware of thinking it a matter of indifference where the burden
is put. Beware of believing that if we tax necessaries of
life, the poor will shift the burden on to the rich : A certain
equilibrium will indeed be attained in the long run, but after
the most frightful sufferings. Before it is established, the
failures of the merchants, who must abandon their industry,
will have caused the nation more loss than all the revenue
from taxation ; the misery and suffering of the laborers will
have cost the nation more lives than the most destructive
wars. These are the terrible methods of reestablishing the
equilibrium. It is this that we see when we abandon those
abstractions which never ought to befog a science that deals
with the happiness and welfare of men." In such strong
language does Sismondi endeavor to combat the theories of
the absolute school. 1 But, while Sismondi is so heated in his

1 " Quoi ! les cultivateurs se feront-ils avocats ou medecins, ou bien horlogers
ou mecaniciens, parce que leurs salaires ne leur suffisent plus pour vivre? . . .
Les laboureurs, dont le corps est accoutume au grand air, dont les mains endurcies
sont rendues incapables de toute operation delicate, dont la sante requiert un
exercice violent, dont I'&me a besoin des jouissances des champs, s'enfermeront-ils
dans une filature de coton ? Quoi ! enfin, parce qu'un impot sur les farines ferait
monter le pain de 4 a 6 sous la livre, les laboureurs quitteraient les champs pour
venir s'enfermer dans les villes, jusqu'a ce que le salaire des ouvriers des champs
fut porte plus haut? . . . Gardons-nous de la dangereuse theorie de cet equi-
libre qui se retablit de lui-meme ! Gardons-nous de croire qu'il soit indifferent
dans quel bassin de la balance on met ou Ton 6te un poids, parce que les autres

The Eclectic Theory 149

criticism, he does not attempt any constructive work; he
even goes so far as to say that he is unable to discover any
general principles.

Another French writer who treated the subject, but in a
manner less profound than some of his successors, is Gamier,
who contends that, in the long run, taxes finally fall on the
consumer. He maintains, however, that there are many limi-
tations which prevent the producer from always shifting the
burden to the consumer. Above all, he denies that the diffu-
sion of taxes leads to an exemption of the taxpayers : " divi-
sion, diffusion, and repercussion are unfortunately not the
synonyms of evaporation." 1

A more important writer is Parieu. This writer's termi-
nology is confusing; he continually confounds the words
" incidence " and " shifting," and speaks of direct and indirect
incidence. His matter, however, is far better than his form of
presentation. Parieu criticises those who maintain that all
taxes are added to the cost of production, and thus distributed
to the consumers. This theory is false, and much exaggerated,
cries Parieu. If the argument were sound, it would not be
worth while to write any books on taxation, or to devote any

ne tarderont pas a se compenser ! Gardons-nous de croire qu'en chargeant d'un
impot les objets de premiere necessite, si les pauvres en font 1'avance, les riches
finiront par le rembourser ! Un certain equilibre se retablit, il est vrai, a la longue,
mais c'est par une effroyable souff ranee. ... Mais, avant que cet equilibre soit
retabli, la faillite de tous les negociants, dans les branches d'industrie qu'il faudrait
abandonner, aurait enleve a la nation beaucoup plus de capitaux, en pure perte, que
1'impot n'aurait rapporte de revenus au fisc. De mme la mortalite parmi les
ouvriers qui ne trouvent plus de gagne-pain, aurait enleve a la nation plus de vies
que la plus desastreuse campagne. C'est par ces moyens terribles que la balance
politique se releve; et, lorsqu'on descend des abstractions, ou il ne faut jamais
envelopper une science qui decide du bonheur et de la vie des hommes, c'est ainsi
que s'opere le redressement." Nouveaux Principes d^Aconomie Politique, ou
de la Richesse dans ses Rapports avec la Population. Par J. C. L. Simonde
de Sismondi. Paris, 1819, book vi, chap. 6; 2d ed., Paris, 1827, ii, pp. 219-
223.

1 Traite de Finances. Par Joseph Gamier. Paris, 1858; 4th ed., 1883,
p. 26. Gamier errs, however, in ascribing this theory to Ricardo. It was the
theory of Canard and Thiers, not of Ricardo. It is remarkable that Canard has
been almost completely neglected by the French writers themselves.

150 Shifting and Incidence of Taxation

thought to the matter ; for, as all taxes would be alike in their
results, there would be no choice between them. Parieu main-
tains, however, that it is possible to lay down one or two gen-
eral principles, which he formulates in this way : Taxes remain
in the first instance on the original taxpayer, if the taxable
commodity is not susceptible of restriction of supply. In
proportion as the supply can be diminished, the tax will be
shifted to other classes. If the individual on whom the tax
has been shifted is, in his turn, in a position to restrict his
enjoyments, he will neutralize in part the effect of this shift-
ing, and will shift the tax either back to the original taxpayer
or on to some other class. 1

This leading principle Parieu applies to the various kinds
of taxes. There is no doubt that he here strikes the key-
note of what may be called the quantitative or mathematical
theory, which will be discussed later on. What Parieu says
is true, as far as it goes, and, rightly interpreted, furnishes a
clue to many of the difficulties of the subject; but Parieu
devotes only a few pages to the whole topic and makes no
effort to get beyond vague generalizations. He concludes
that, as a general rule, "the imposition of taxes, except in
the case of taxes on commodities levied wholesale on the
producer, cannot be regarded as producing a shifting which
completely inverts the first natural effects of the tax. In
most cases, the whole or the greater part of the tax remains
on him who pays it actually or ostensibly in the first or
second degree of the incidence." 2 Although he did not

1 " L'impot reste, au moins immediatement, a la charge de celui qui le paye,
si 1'objet sur lequel il est assis n'est pas susceptible du restriction. II est rejete en
tout ou partie sur d'autres contribuables, si 1'objet sur lequel il est assis est sus-
ceptible de restriction, et la repercussion de 1'impot est en raison meme de la
facilite de cette restriction. Si celui sur lequel 1'impot est reflechi est a son tour
en etat de reserrer la jouissance a 1'occasion de laquelle il recoit le contre-coup de
la taxe, il neutralisera en partie 1'effet de la repercussion de 1'impot en la rejetant,
soit sur le contribuable primitif, soit sur d'autres." Traite des Impbts, consider'es
sous le Rapport Historique, Economique et Politique. Par M. Esquirou de Parieu.
Paris, 1862; 2d ed., 1866, i, p. 68.

2 " L'incidence des taxes ne peut etre consideree comme realisant, si ce n'est
pour les denrees frappees en gros chez les producteurs, une reflexion completement

The Eclectic Theory 151

grasp the whole subject, and did not even develop his own
principle successfully, Parieu deserves more than a passing
notice as pointing out one of the most important elements in
the solution of the problem.

The other French writers have not contributed materially
to the solution of the problem. Thus, the work of Du
Puynode is voluminous but not very critical. He makes the
whole subject extremely simple. According to his theory,
taxes on land as well as those on houses are ordinarily borne
by the owners : " all the imaginary distinctions of Smith and
Ricardo are without foundation." 1 Taxes on personal prop-
erty or profits, he contends, are always shifted to the con-
sumer; while taxes on wages always rest on the laborer by
whom they are paid in first instance. 2 It is easy, of course,
to solve the problems in this way.

The volumes of Vignes are important in the study of many
other aspects of taxation, but his treatment of incidence is
not especially noteworthy, except for the fact that he opposes
both the theory of "scepticism" and that of "equal diffu-
sion." 3 He deals, however, mainly with special taxes, and
does not seem well acquainted with the literature. Some of
his views are interesting and will be noticed later.

Finally, Leroy-Beaulieu, in his comprehensive treatise on
public finance, skims over the general problem. We do,
indeed, find a few strong passages scattered through the
volume, but only in connection with special points. 4 While
admitting that there is a certain element of truth in the

destructive, des premiers effets naturels de 1'imposition. Dans la plupart des cas,
tout ou partie de la charge reste reellement imposee sur celui qui supporte visible-
ment et ostensiblement dans le premier ou le second degre de son incidence."
Ibid., p. 83.

1 De la Monnaie, du Credit et de VImpbt. Par Gustave du Puynode. Paris,
1853, ii, p. 175.

2 Ibid., ii, pp. 215, 321, 365.

8 Traite des Impbts en France. Par M. Edouard Vignes. 4th ed., by Vergni-
aud. Paris, 1880, ii, pp. 68, 97, 118, and 173.

4 Traite de la Science des Finances. Par Paul Leroy-Beaulieu. 5th ed.,
1892, i, pp. 180, 413, and 769-771. In his recent Traite Theorique et Pratique
d* Economic Politique, 2d ed., 1896, Leroy-Beaulieu devotes several pages to the

152 Shifting and Incidence of Taxation

"general repercussion" doctrine, he warns his readers against
placing too much reliance on it. We search through his
works in vain for anything constructive.

In Germany we find more noteworthy contributions to the
subject. The early German writers on public finance
such as Soden, Jakob, Fulda, Malchus, Biersack and Mur-
hard may be passed over as comparatively insignificant.
They certainly made no definite impression on the course of
the theory. 1 One of the early Germans, von Thiinen, must,
however, be mentioned because of his prominence in other
domains of economic science.

Von Thiinen devotes only a small portion of his remark-
able work to the problem of taxation, and there discusses
principally the incidence of the land tax. But his doctrine is
worth noticing as showing how the equal-diffusion theory,
logically developed, results in an absurdity. " It would seem
then," he says, "that the state can increase its taxes to any
conceivable extent, without harming the community, since
every active citizen would bear the tax only nominally if he
were simply to advance the tax without paying it in last
instance. But this remarkable conclusion," adds von Thiinen,
"depends on the assumption that, after the imposition of
the tax, the consumption of commodities remains the same.
And that is, of course, the weak point of the theory." 2

general topic (iv, pp. 791-799), but contents himself with a few unsatisfactory
generalizations.

1 Those who desire to study in detail the views of these rather unimportant
writers are referred to the books of Kaizl and Falck (mentioned above, p. 3),
who deal especially with the German authors.

2 " Es scheint demnach . . . dass der Staat die Abgaben bis aufs aiisserste
erhohen konne, ohne dadurch das Wohl des Ganzen zu gefahrden, indem von alien
seinen thatigen Burgern kein Einziger dadurch bedriickt wird, weil Jeder die
Abgabe nur vorschiesst, nicht selbst bezahlt. . . . Die Schlfisse, wodurch wir
dieses sehr auffallende Resultat erhalten, beruhen auf der Voraussetzung, dass
nach der Einfiihrung der Abgabe die Consumtion dieselbe bleibt." Der isolirte
Staat, in Beziehung auf Landwirthschaft und Nationalokonomie. Von Johann
Heinrich von Thiiren. Hamburg, 1826; 3d ed., Berlin, 1875, P ar ^ i P- 337- Cf-
the French translation by Laverriere: Recherches sur V influence que le Prix
des Grains, la Richesse du Sol et les Impbts exercent sur les Systentes de Culture.
Paris, 1851, p. 292.

The Eclectic Theory 153

With Rau, however, we come to some positive results.
Rau lays down his conclusions in the seven following prin-
ciples : I. A tax can be shifted only when it induces the j
majority of the taxpayerg-to-a^uftifocrp mnHnrf,

| about ji change in supply and demand. 2. A tax assessed
on the income of an entire class cannot be easily shifted to
the vendors of certain goods, because the restriction of the
taxpayers' expenses affects different commodities unequally,
so that the slight decrease of the demand will often be coun-
terbalanced by a decrease of the supply. 3. Taxesjwill be
shifted most easily on the consumers when all the sellers
see themselves equally forced to make good the tax by de-
creasing supply, as in the case of customs duties. 4. Taxes
on classes with fixed incomes, like public officials, can-
not possibly be shifted. 5. Taxes which are not assessed
according to the quality of goods for sale are less easily
shifted than others. 6. In taxes on rent, on the source of
profits, and on wages or profits, the important consideration
is whether the taxpayer can escape the tax through a change
in investments. 7. The transference of taxation cannot
excuse an unjust system of assessment, because (a) the
shifting is often more apparent than real, (b) if only a few
taxpayers are assessed too high or too low, prices will not be
affected, (c) in the interval many hardships are sure to ensue,
and (d) even a complete shifting of a high tax is not without
bad results because it often diminishes both production and
consumption. 1 These principles of Rau, as we shall see
hereafter, are of considerable help in the investigation of
special problems.

1 Grundsatze der Finanzwissenschaft. Von Dr. Karl Heinrich Rau. Heidel-
berg, 1832; 5th ed., 1864, iii, pp. 412-417. The sixth point reads as follows:
" Insbesondere Tkommt es bei Steuern, die den Ertrag einer einzelnen Guterquelle
zu treffen bestimmt sind, darauf an, ob der Besteuerte durch eine anderweitige
Verwendung jener Quelle oder andere Einrichtungen der Auflage ausweichen
kann. Dies wird in vielen Fallen durch die Beschaffenheit des werbenden Ver-
mogens verhindert. . . . Desshalb bleiben die meisten Steuern auf den Renten
des werbenden Vermogens liegen, die auch wirklich den grossten Theil des
steuerbaren Einkommens ausmachen, oder werden noch auf sie hiniibergewalzt."

154 Shifting and Incidence of Taxation

More important, and in some respects the most suggestive
of the works hitherto considered, is the book of von Hock.
This author was the first to analyze and define the various

>ds of shif tings the shifting forward, the shifting back-

ird, and the shifting off, terms to which allusion has been
J /made in the introduction. 1 He maintains that, from the
/ standpoint of the taxpayer, the tax must always be (i) a part
of the cost of production of the commodity taxed, (2) a part
of the general business expenses, (3) a part of the cost of
subsistence, or (4) a burden on the net revenue or income.
Examples would be, respectively, a tax on the manufacture of
spirits, a license or business tax, a poll or house tax, and an
income tax. In general, taxes of class one, class two and
class three so far as the necessaries of life are concerned
are virtually additions to the cost of production, and thus
tend to be shifted to the consumer. But this general rule
has many exceptions, which may be summed up as follows: 2
(a) There will be no shifting in general and for a long period
when the tax is so high as to produce a decrease of demand,
or a substitution of inferior products on the part of the con-
sumer, (b) There will be no shifting temporarily, when the
state of the market changes so that the price of the articles
falls below the price before the tax was imposed, (c) The
exceptions to the shifting of taxes on necessaries of life are
far more frequent and dangerous to the laborer than the
above exceptions to the producer ; for wages vary frequently,
and an increase of price in the necessaries of life, joined with
a low rate of wages, has the most lamentable results.

While Hock, therefore, accepts in general the cost of pro-
duction theory of taxation, he is by no means a follower of
Canard or Thiers. He confesses that, in the long run, the
shifting of some taxes will produce an equilibrium only
this is not a fixed equilibrium, but one that is continually dis-

1 He termed these " Fortwalzung," " Ruckwalzung " and " Abwalzung " all
of them modes of " Ueberwalzung " or shifting.

2 Die offcntlichen Abgaben und Schulden. Von Dr. Carl Freiherrn von Hock.
Stuttgart, 1863, pp. 91-96.

The Eclectic Theory 155

turbed by the conditions of the market and is completely
overthrown by every important economic reform. Above all,
he adds, it is not to be assumed that this equilibrium is neces-
sarily just, or even beneficial, from the economic point of
view; for under certain conditions the shifting of taxation
may increase, and not decrease, the original injustice. The
optimistic theory of diffusion is, then, utterly untenable. 1

Prince-Smith seeks to solve the problem in somewhat the
same way. He ridicules the diffusion theory which virtually
maintains that the burden of taxation, like the ball in the
game of shuttlecock and battledoor, is continually thrown
from hand to hand, and always remains suspended in the
air without ever falling on anybody. 2 On the contrary, says
he, the shifting of taxation depends on certain conditions. It
can take place only through increase of price ; and increase
of price can be due only to increased demand or decreased
supply. As the producer cannot increase the demand, he
must reduce the supply. Apart from the question of outlets
in international trade, this is possible only through limitation
of production that is, by the transfer of capital and labor
to other occupations. The whole problem of shifting thus
reduces itself to the question: Which is more injurious to
bear the tax without shifting, or to suffer through the limita-
tion of production ? In general, he concludes, a tax will be
shifted only when the transfer brings in more than it costs.
In other words, the whole question of incidence is, according
to Prince-Smith, simply a question of calculation. Applying
his theory to practical cases, he thinks that the land tax and

1 " Es ist allerdings wahr, dass die Uberwalzung der Steuern zulezt eine
Ausgleichung zur Folge habe, allein das hierdurch hergestellte Gleichgewicht ist
ein labiles, das jeden Augenblick dutch die Schwankungen des Marktes gestort
und durch jede tiefer greifende wirthschaftttche Reform ganz aufgehoben wird.
... Es kann unter gewissen politischen und commerciellen Vorbedingungen die
Steuer durch fortgesetzte Ueberwalzungen eben so leicht ungerechter und scha'd-
licher werden als das Gegentheil." Ibid., pp. 108, 109.

2 " Ueber die Abwalzung." Von John Prince- Smith. In Vierieljahrschrift
fur Volkswirthschaft und Kulturgeschichte, xiii (1866), p. 130. Reprinted in his
Gesammelte Schriften. Berlin, 1877, i, pp. 43-64.

156 Shifting and Incidence of Taxation

the house tax cannot be shifted, and that the indirect taxes
or taxes on wages can be shifted only through the bankruptcy
of the weakest, and that bankruptcy of the laborer means
starvation and death. As a protest against the absolute and
diffusion theories, Prince-Smith makes a strong case, although
some of his own positions are not always tenable.

The more recent German writers on public finance have,
with few exceptions, done little to advance investigation
along these lines. For example, Roscher follows in the main
the exposition of the older English writers. 1 Schaffle deals
chiefly with the question of capitalization. 2 Wagner, even in
the last edition of his great work, bases his exposition pri-
marily on the works of Rau and Hock, and does not really
get beyond them. 8 Cohn contents himself with a few vague
generalizations which are of little use. 4 Vocke practically
limits himself to the statement that reliance on the general
shifting of taxes is treacherous, and that the whole subject
properly belongs to the general economic doctrine of cost of
production. 5 Von Schall, the author of the latest monograph
on taxation, devotes four and a half pages to the topic of
shifting. We accordingly find in his exposition little but
platitudes. 6 In fact, the recent German literature is signifi-
cant mainly for the fact that it attempts, sometimes very
successfully, to evade the difficulties of the problem.

1 System der Finanzwissenschaft. Von Wilhelm Roscher. Stuttgart, 1886,

38-43.

2 Die Grundsatze der Steuerpolitik und die Schwebenden Finanzfragen. Von
Dr. Albert E. Fr. Schaffle. Tubingen, 1880, pp. 173-192. His most recent work
discusses the topic somewhat more broadly, but is somewhat lacking in precision.
Die Steuern, Allgemeiner Theil, 1895, drittes Buch, I Haupteintheilung, IV Ab-
schnitt, 3 Kapitel.

8 Finanzwissenscha.fi. Von Adolph Wagner. Leipzig, 1880, ii; 2d ed., 1890,

PP. 332-372.

4 System der Finanzwissenschaft. Von Gustav Cohn. Stuttgart, 1889, pp.
304-311. English translation by T. B. Veblen under the title of The Science of
Finance. Chicago, 1895, PP- 365~373-

5 Die Grundzuge der Finanzwissenschaft. Von Dr. Wilhelm Vocke. Leipzig,
1894, pp. 205-212.

6 " Allgemeine Steuerlehre." Von K. Fr. v. Schall. In Schonberg's Handbuch
der politischen Oekonomie. TUbingen, 4th ed., iii, 1897, pp. 236-240.

The Eclectic Theory 157

The English writers who have not yet been mentioned may
be passed over with a few words. Richard Jones was one of
the first to deny the Ricardian doctrine of incidence, as he
was the first to dispute Ricardo's theory of distribution. He
confined himself almost exclusively to the tax on wages and
that on consumable commodities. Jones maintained that it
is impossible to tell beforehand the ultimate incidence of a
tax on wages ; for this, he said, depends upon the effect of
the tax upon the movements of population. If the tax were
laid on wages, under such circumstances that it would not
affect the movement of population but would be met by a
sacrifice of secondary gratifications, it would not be shifted.
Only under conditions the reverse of these would the tax be
shifted from wages to profits. 1

David Buchanan had preceded Jones in controverting some
of Adam Smith's doctrines on incidence. He took exception
to the distinction between the ground rent and the building
rent in the house tax. 2 Above all, he opposed the view that
a tax on labor will produce a corresponding rise in wages. If
wages were always at the bare minimum point, then indeed,
he admitted, the doctrine might be true; but "while the
wages of labor afford comforts and even luxuries, the laborer
will always possess a fund for the payment of taxes. . . . All
taxes on labor, or on such commodities as the laborer con-
sumes, take effect by abridging his comforts. They increase
the hardships, and tend generally to degrade the condition of
the laboring classes." 3 We have already seen that the argu-
ment of Buchanan induced Ricardo to make a qualification of
his rigid theory. 4

1 "Tract on the Incidence of Taxes on Commodities that are consumed by
the Laborer." By Rev. Richard Jones. In Literary Remains, consisting of
Lectures and Tracts on Political Economy. London, 1858, pp. 143. Cf. "A
Short Tract on Political Economy," ibid., p. 277.

2 An Inquiry into the Nature and Causes of the Wealth of Nations. By
Adam Smith, LL.D. With Notes and an Additional Volume, by David Buchanan.
Edinburgh, 1817, iii, p. 300, note.

3 Ibid., pp. 338, 339. See also Observations on the Subjects treated of in Dr.
Smithes Inquiry, etc. By David Buchanan. Edinburgh, 1817, 2d ed., pp. 59-64.

* Above, p. 119.

158 Shifting and Incidence of Taxation

James Mill, although he seeks to differentiate the doctrine
in some points, is, on the whole, a follower of Ricardo. Mill
maintains that a tax on produce or on farmers' profits is
shifted to the consumer. So, also, he says, a tax on profits of
stock will fall on profits. On the other hand, Mill accepts
Ricardo' s theory of the tax on wages, but only on the assump-
tion that wages are at the lowest point to which they can be
reduced. Otherwise, he thinks, a tax on wages will not be
shifted to profits. 1

Senior confines his discussion to a few points. He agrees
that taxes on manufactured commodities raise the price, gen-
erally by a sum exceeding the amount of the tax. But he
takes issue with Ricardo in regard to a tax on agricultural
produce. Senior maintains that, while the immediate effect
of such a land tax is to raise prices, its ultimate effect is to
diminish both the production and the consumption of raw
produce, and therefore to leave its price unaffected. Tithes
will, therefore, not be shifted to the consumers. 2

John Stuart Mill keeps, in the main lines, to the arguments
of his predecessors. He assumes perfectly free competition
and the complete transferability of capital, and on these
assumptions builds up his whole superstructure. He follows
Ricardo, except in three points. In the first place, he accepts
Senior's emendation of the doctrine of tithes, that in the long
run the incidence is on the landowner, and not on the con-
sumer. Secondly, he accepts the view of his father as to the
incidence of a tax on wages. Thirdly, he analyzes more
closely the incidence of taxes on exports and imports. 3

McCulloch displays independence in only one point. A
special tax on profits, he contends, will not necessarily raise
prices, as Ricardo thought : instead of being shifted to the

1 Elements of Political Economy. By James Mill, Esq. London, 1821; 3d ed.,
1844, chap, iv, sec. v-xiii, pp. 248-292.

2 Political Economy. By Nassau William Senior. London, 1835 > 6th ed - l8 7 2
pp. 120-124.

8 Principles of Political Economy, with some of their Applications to Social
Philosophy. By John Stuart Mill. London, 1847, book v, chap, iv, 4; chap, iii,
4; and chap, iv, 6.

The Eclectic Theory 159

consumer, it may lead to a reduction of cost. McCulloch
points out that the producer will endeavor to meet the press-
ure of the tax, and to defeat it by greater skill and industry,
by increased facility of production, or by a saving of expense,
so that the tax will not continue to fall on him. Further-
more, it will not fall on the consumer. 1 In reality, however,
this doctrine explains, not any process of shifting, but what
was termed in the introduction the " evasion " of taxation ;
which is a very different thing. This idea of evasion may
accordingly be said to have been introduced into scientific
discussion by McCulloch.

The treatment of the subject by Fawcett is remarkable,
first, for the exaggeration of some of the extreme statements
of the older economists, as, for example, the contention
that a tax on commodities raises prices far beyond the amount
of the tax and, secondly, for the somewhat vague ideas on
the incidence of local taxation. 2 As both these points will be
fully treated later, we may omit them here.

An interesting criticism of the older theories is to be found
in the work of Cliffe-Leslie. This able writer pointed out
that the older conclusions were frequently too rigid. " The
theoretical canons commonly applied to determine the inci-
dence of taxes," said he, " are often misleading. They fur-
nish us simply with inferences from ideal * average,' or
* natural/ rates of wages and profit, respecting the ' tenden-
cies ' of taxes ' in the long run ' and in the absence of disturb-
ing causes." But taxes are paid immediately, under the real
conditions of life, and out of the actual wages, or profits, or
other funds of individuals, not out of hypotheses or abstrac-
tions in the minds of economists." 3 Cliffe-Leslie called

1 A Treatise on the Principles and Practical Influence of Taxation and the
Funding System. By J. R. McCulloch. London, 1845; 3 d ed - J ^3, p. 72.

2 Manual of Political Economy. By the Rt. Hon. Henry Fawcett. London,
1863; 6th ed., 1883, esp. pp. 551 and 613.

3 " The Incidence of Imperial and Local Taxation on the Working Classes."
By Thomas Edward Cliffe-Leslie. In his Essays in Political and Moral Philoso-
phy, London, 1879; 2d ed. under the title Essays in Political Economy, London,
1888, pp. 388, 389.

160 Shifting and Incidence of Taxation

attention to the effects of economic friction in neutralizing
the working of supposed immutable laws, and in producing
practical effects sometimes the very reverse of those assumed.
He confined his arguments, however, to a few taxes ; and his
own constructive work is not very elaborate. His special
doctrines will be noticed below.

The most recent treatment of the subject is to be found in
the two general treatises on the science of finance by Professor
Bastable and Professor Graziani, both of them published since
the first edition of this work. Professor Bastable takes a more
realistic view of the problem than many of his English pred-
ecessors. He not only devotes a chapter to the general
discussion, 1 but appends some interesting, though brief, ob-
servations on the incidence of particular taxes. Much the
same may be said of the treatment of the subject by Profes-
sor Graziani. 2 The views of both writers, which will be
considered hereafter, are largely in harmony with those con-
tained in the second part of this investigation.

1 Public Finance. By C. F. Bastable. London, 1892; 2d ed., 1895, book iii,
chap, v : " The Shifting and Incidence of Taxation."

2 Istituzioni di Scienza delle Finanze. Da Augusto Graziani. Torino, 1897,
libro v, capit. iv : " La Repercussione delle Imposte."

CHAPTER VI
THE NEGATIVE OR AGNOSTIC THEORY

THE doctrine that it is impossible to form any general
conclusions about the subject of shifting scarcely seems to
merit a place in the list of theories of incidence. Yet, as this
is an opinion not infrequently met with among practical men,
it will be well to give it passing attention.

The ablest expounder of this theory is Adolf Held. His
discussion of incidence is based on a denial of cost of produc-
tion as a condition of normal profits. 1 Held follows Schaffle
in generalizing the rent conception, and is, to this extent, a
forerunner of the recent English and American writers who
adopt the same idea. This conception, applied to profits,
results in the theory of greatest or marginal cost, and in the
explanation of profits as the difference between marginal cost
and market price. Held, however, does not draw the correct
conclusions from his theory. He was an acute thinker, and
a man of the noblest ideals ; but he became so imbued with
the idea that all of the old political economy was worthless
that his strictures are as often false as true. Like so many
of the younger Germans, he was stronger in criticism than
in construction; and his own positive contributions to pure
theory are not very profound. His whole treatment rests on
a misunderstanding, which sometimes almost seems to be a
wilful perversion, of the doctrine of cost of production. It
would not repay us to discuss all his points in detail, as even
the Germans themselves, who were at one time deeply im-
pressed with his views, have now repudiated his extreme

1 " Zur Lehre von der Ueberwalzung der Steuern." Von Adolf Held. In
Tilbinger Zeitschrift fiir die gesammte Staatswissenschaft, 1 868, pp. 422-495.
M 101

1 62 Shifting and Incidence of Taxation

doctrines. His conclusions are chiefly negative, and may be
summed up in the confession that we can know nothing
about the whole subject of incidence. 1 From Held, there-
fore, we learn nothing positive. His conclusions, moreover,
have been accepted only by writers of such little standing
that any further consideration of the agnostic theory is
unnecessary.

1 Cf., as a sample, the following conclusion : " Ueber die Abwalzung der Kapi-
talzinssteuer lasst sich also gar nichts sagen, sie lasst sich nicht einmal allgemein
leugnen." Tubinger Zeitschrift fur die gesammte Staatsiuissenschaft, p. 481.

CHAPTER VII

THE SOCIALISTIC THEORY

WHAT is here termed the socialistic theory of incidence
really ought not to be put on a level with the general theories
discussed in the earlier chapters ; for it is a doctrine that is
confessedly partial in character. But its application is so
general, and its propagation among large classes influenced
by the socialistic leaders is so earnest, that it deserves a few
words.

The theory was developed primarily by the great agitator
Lassalle. Lassalle devotes himself especially to the consid-
eration of the laborer's interests. He terms indirect taxes
all those which are not assessed directly on individual income
or property, including, therefore, under this head not only
taxes on consumption, but also land and business taxes. All
these indirect taxes in Germany, for instance fall ulti-
mately, says Lassalle, on the poorer classes of society ; for,
since the laborer has not sunk quite so low as the Irish work-
man or the Indian ryot, a little more can be taken from his
wages before reducing him to starvation. Adam Smith and
Ricardo, who were correct enough in their theory of the inci-
dence of taxes on produce, he continues, are here mistaken ;
since it is a scientific fact that wages, as compared with other
commodities, are always the last to rise in price. It is there-
fore the laborer who bears all the so-called indirect taxes
that is, the greater part of all taxes. 1

This exaggerated doctrine has been accepted not only by
most of the socialistic theorists, but also by popular writers

1 Die indirekte Steuer und die Lage der arbeitenden Klassen. By Ferdinand
Lassalle. Zurich, 1863, pp. 9, 36, 41, etc.

163

164 Shifting and Incidence of Taxation

who are very far removed from socialism. Mr. Thomas G.
Shearman, for instance, while indeed limiting the definition
of indirect taxes more narrowly than Lassalle, is equally
extravagant in his statement of their incidence and effects. 1
The more modern and more scientific view, on the other
hand, is that there is nothing inherently bad about an indi-
rect tax, just as there is nothing inherently good about a
direct tax. It depends entirely upon what kind of a direct
or indirect tax it is. There are some good indirect taxes
which do not fall on the laborer at all ; just as there are some
bad direct taxes which, as we shall see later, do fall on the
laborer.

1 Natural Taxation. An Inquiry into the Practicability, Justice and Effects
of a Scientific and Natural Method of Taxation. By Thomas G. Shearman.
New York, 1895. See es P- cha P- "i " Crooked Taxation."

CHAPTER VIII
THE QUANTITATIVE OR MATHEMATICAL THEORY

THE authors who have in some respects done the best work
in the study of the incidence of taxation are precisely those
who have until recently been largely neglected. 1 They may
be called, for lack of a better name, the quantitative or
mathematical school. They are united not so much by
similarity of conclusions as by identity of method.

Of these the earliest and most suggestive is Cournot. He
started out from the assumption that the whole theory of
incidence is an integral and necessary part of the general
theory of value. In his first and most profound work, 2 in
which he laid down many of the general principles which
to-day form essential parts of the newer doctrines in pure
economics, he attempted to apply his theory of value to the
study of taxation. Cournot studied commodities under the
regime of monopoly and of competition respectively, and
employed the methods of differential calculus to ascertain
what influence an increase in the supply price of any com-
modity would have on the producer as well as on the con-
sumer. He analyzed the laws of constant, increasing and
diminishing returns in their relations to this influence, and he
came to some important conclusions which will be discussed
in the second part of this work.

While it is undeniably a relief to read the clear-cut and

1 Not one of the recent German or French elaborate works in finance refers to
a single member of this school. Kaizl and Falck also neglect them completely.

2 Recherches sur les Principes Mathematiques de la Thcorie des Richesscs.
Par Augustin Cournot. Paris, 1838, chaps, vi and viii. An English translation
was published in 1898 in Professor Ashley's Series of Economic Classics, under
the title of Researches into the Mathematical Principles of the Theory of Wealth.

165

1 66 Shifting and Incidence of Taxation

precise doctrines of Cournot, as compared with the vague
and misty generalizations of many writers of the eclectic
school, his treatment of incidence is not entirely adequate.
His whole study is practically a discussion of the incidence of
taxes on commodities. He fails to remember that there are
other taxes besides those on commodities and on profits ; and
he ignores the fact that to regard a tax as raising the normal
supply price or the cost of production does not exhaust the
possibilities of the case. It is true, indeed, that in a later
work l he attempts to discuss the incidence of taxation with-
out the use of mathematics, and to extend the discussion to
other taxes. But this attempt is not always successful. In
certain cases for example, the tax on buildings his views
are even erroneous. Moreover, whole classes of taxes, like
that on wages, are omitted ; and no attempt is made to lay
down any general conclusions. So far as the study of the
taxation of commodities is concerned, however, Cournot's
book has scarcely been surpassed.

Some of Cournot's ideas were developed by another French
mathematician, Fauveau. He added practically nothing,
however, except a series of elaborate mathematical formulae,
and is to be noticed mainly because of his energetic opposi-
tion to the optimistic theory. "The diffusion of taxes," says
he, "cannot render taxes proportional any more than the
diffusion of light makes a room equally illuminated in every
part, whatever be the position of the candle." 2 Fauveau
concludes rather sadly that it is quite as easy for an originally
equal tax to become unequal in its operation as for an origi-
nally unequal tax to become equal.

Many years later an attempt of a similar nature was made
by an English mathematician, Fleeming Jenkin. Jenkin's
essay deals chiefly with what he calls taxes on commodities.

1 Principes de la Theorie des Richesses. Paris, 1863, book iii, chap. viii.

2 " La diffusion de 1'impot, nous parait-il, ne peut pas le rendre en definitive
proportionel pas plus que la diffusion de la lumiere ne fait qu'une chambre est
eclaircie egalement en tous ses points quel que soit 1'endroit de cette chambre ou
1'on a place une bougie." Considerations Mathematiques sur la Theorie de
VImpbt. Par G. Fauveau. Paris, 1864, p. 58.

The Mathematical Theory 167

Although he evidently knew nothing of Cournot, Jenkin was
among the first of the Englishmen to apply the mathemati-
cal method to economic problems. His original contribution
consisted in the use of diagrams based on a combination of
the demand curve and the supply curve. He concluded
that "the ratio in which a tax on commodities falls on
sellers and buyers is simply the ratio of the diminution of
price obtained by the sellers to the increase of price paid by
the buyers." 1 In his treatment of taxes on land and on
houses, however, Jenkin failed to make the qualifications
which alone can give the results practically true in every-day
life. Moreover, he neglected other taxes, and made almost
no attempt to give any general laws of incidence. Jenkin's
remarks on the special point of the influence of taxes on
cost, however, are suggestive, and will be considered later.

About a decade later, a young Italian economist, who has
since become well and favorably known to English readers,
Professor Pantaleoni, devoted a whole volume to the study of
the incidence of taxation. 2 He, also, was ignorant of the
work of Cournot, but attempted to base his theory on the
doctrine of cost of production worked out on arithmetical
lines. Pantaleoni devoted over half of his work to what is
really a part of pure economic theory the doctrine of value
and then proceeded to discuss the incidence of some of
the chief separate taxes. His study is the most comprehen-
sive one yet published on the general subject, although
strange to say it has, until very recently, received no con-
sideration outside of Italy itself. While there is a great deal
of acute and original thought in the monograph, the work
suffers from the fact that its doctrine of incidence is largely

1 Fleeming Jenkin, " On the Principles which Regulate the Incidence of
Taxes," in Proceedings of the Royal Society of Edinburgh, Session 1871-1872, pp.
618-631. Cf. Grant's Recess Studies, 1870, pp. 151-185, for his "Supply and
Demand schedule." The essay on taxation was reprinted in Papers, Literary,
Scientific, &c., by the late Fleeming Jenkin. Edited by Sidney Colvin and
J. A. Ewing. London, 1887, ii, pp. 107-122.

2 Teoria delta Traslazione dei Tributi. Definizione, Dinamica e Ubiquita
della Traslazione. Da Maffeo Pantaleoni. Rome, 1882.

1 68 Shifting and Incidence of Taxation

based upon economic theories which are open to question.
Thus, the value of the author's treatment of the tax on
profits is somewhat impaired by the dubious doctrine of
profits that he espouses. Again, his treatment of the land
tax and of the house tax is neither exact nor correct. It may,
in fact, be affirmed that some of the doctrines upheld in the
work no longer represent the views of the author. 1 We omit
in this place a detailed statement of the special doctrines, as
we shall have occasion to revert to them constantly in the
following pages. Notwithstanding some imperfections, Pro-
fessor Pantaleoni's work contains, on the whole, the best
existing treatment of the incidence of taxation, as a matter of
pure theory.

Comparatively few of the recent continental writers belong-
ing to the mathematical school have attempted to make any
application of this method to the theory of the incidence of
taxation. As regards the Austrian writers, who have devel-
oped the psychological, rather than the mathematical, method
in economics, and who have applied the newer theories of
value to various problems of taxation, neither Menger, Wieser,
Bohm-Bawerk nor Sax has made use of these newer theories
to explain the doctrines of incidence. On the other hand,
Auspitz and Lieben in Austria, and Launhardt in Germany,
apply some of their diagrams of the supply and demand
schedules to questions of taxation. 2 Among the modern con-
tinental writers of the mathematical school, however, the
French, or rather Swiss, economist Walras stands preemi-
nent. When he discusses the theory of taxes on monopolies,
he refers to the works of Cournot and Dupuit. 3 But his own

1 In answer to a letter from the present writer stating that he did not agree
with several of the doctrines laid down in the work, Professor Pantaleoni intimated
that his present views differ in some respects from those expressed in the book.

2 Auspitz und Lieben, Untersuchungen iiber die Theorie des Preises, 1889;
W. Launhardt, Mathematischc Begriindung der Volkswirthschaftslehre, 1885.

8 Dupuit was one of the first to attempt to illustrate the principles of marginal
utility and of monopoly price by mathematical methods. See his articles " De
la mesure de 1'utilite des travaux publics," in the Annales des Fonts et Chausees, 2d
series, vol. viii, 1844; and " De Pinfluence des peages sur 1'utilite des voies de
communication," Ibid., 1849.

The Mathematical Theory 169

treatment of the whole subject results in conclusions that
seem a little too simple. According to Walras, a tax on land,
owing to the theory of the rent charge, rests only on the
original owners. A tax on wages rests on the wage-earner,
because the theory of capitalization is not applicable here.
A tax on what he calls artificial capital or interest is nothing
but an indirect tax on consumption, because it is inevitably
shifted. Taxation can really hit only " natural wealth," that
is, either agricultural rent or wages. 1 In a more recent work,
Professor Walras recurs to his general theory of taxation, but
has only a little to say about incidence, further than to point
out the impossibility of the equal-diffusion theory. 2

We come now to a group of economists who have ad-
vanced some new views during the past few years. One
of the most original of these recent efforts has been made by
an acute Swedish writer Knut Wicksell. 3 He complains
that the ordinary theory of incidence deals only with the rela-
tions of the producer to the consumer; and objects that, in
the many cases where the tax is supposed to rest upon the
producer, this theory does not go far enough, since produc-
tion is a process involving the cooperation of several factors
land, labor and capital. The real difficulty, therefore, says
Dr. Wicksell, is to trace the effect of a tax on these various
classes of society, the farmers, the capitalists and the
laborers. In order to solve this problem, he accepts the the-
ory of Bohm-Bawerk as to the importance of the comparative
period of investment. 4 This theory, as is well known, states
that the longer the comparative production-period or period
of investment of capital, the greater its productivity. Since
the application of labor amounts to a lengthening of this

1 Theorie Critique de Vlmpot. Par Leon Walras. Paris, 1861, pp. 31-57. In
his Elements d" 1 Economic Politique Pure, M. Walras seems to have altered his
opinion, but still clings to the rent-charge theory. See the 3d ed., 1896, pp.
446-460.

2 Etudes d' Economic Sociale. Par Leon Walras. Paris, 1896, p. 445.

8 Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Stcuer-
ivesens Schwedens. Von Knut Wicksell. Jena, 1896.
4 Ibid., p. 31.

170 Shifting and Incidence of Taxation

period of investment, the productivity of labor will increase
with the extent to which it is applied in long periods of pro-
duction. Starting out from this premise, Dr. Wicksell seeks
to reconstruct the theory of incidence, by endeavoring to
measure the effects of a tax upon the elements that con-
tribute to a lengthening or a shortening of the production
period. 1 His conclusions, however, although based on much
keen and attractive analysis, are vague. In order to simplify
his processes, he posits all kinds of hypotheses which are not
true in actual life, and seeks to bolster up his conclusions by
a detailed apparatus of mathematical reasoning. When he
comes to the conditions of real life, the complications become
so great that his preliminary hypotheses turn out to be of
little use, and the conclusions vanish. 2 Nevertheless, as an
intimation of the kind of difficulties that . beset those who
attempt to trace the ultimate effects rather than the imme-
diate incidence of certain kinds of taxes, Dr. Wicksell's book
is worthy of study. Whether the application of his new
principle will really solve any present problems is still to be
ascertained.

Among the most recent Italian writers of the mathematical
school, reference may be made to Professor Conigliani. He
devotes himself primarily to the wider subject of the general
effects of taxation. 3 So far as he speaks of shifting and inci-
dence, he attempts to give only the "abstract, general the-
ory," apart from its application to any existing systems of
taxes, and apart from any " exceptional, transitory or irregu-
lar" phenomena. The result of such a method of study,
based on the recent Austrian theories of subjective value, is

1 Finanztheorctische Untersuchungen nebst Darstelhmg und Kritik des Steuer-
ivescns Schwedens, p. 37.

2 Dr. Wicksell himself states : " Dies mag nun so klingen als ob die praktische
Losung der Frage fur immer unmoglich sei." He thinks that an escape from this
conclusion may be found in the fact that we really need only an approximate
answer. But he nafvely adds : " Allerdings fehlen sogar fur eine solche approxi-
mative Losung die notigen Data so gut wie vollstandig." Ibid., p. 56.

8 Teoria generate degli Effetti Economici delle Imposte. Saggio di Economia
Pur a. Del Dottor Carlo A. Conigliani. Milan, 1890.

The Mathematical Theory 171

partly a series of truisms in which we cannot, even with
the best of will, discern much advance in theory and partly
a statement of tendencies couched in such general terms as
to be of little use in the elucidation of practical problems.
We include Conigliani under the mathematical school only
because he himself professes to be among its followers. As
an example of his method, we give his final conclusion : " A
tax of given intensity and extension falls with the less inten-
sity and extension on individual economies, and produces a
less unequal effect on economic society, in proportion as
society is more developed. The incidence, when it does not
have a considerable extension or intensity, assumes the less
easily the character of a change in activity, in proportion as
society is more advanced. Finally the change in consump-
tion will take place with greater disturbance of the equilibrium
in the degree of the satisfaction of wants, and therefore with
less change in the internal arrangement of individual econ-
omy, in proportion as the social environment in which these
changes of taxation take place is more advanced." * And
this, Conigliani tells us, " completely exhausts the general
theoretic problem of the effects of taxation."

It is only fair to Professor Conigliani to state that in
another more recent work 2 he has shown his ability to
grapple with the detailed problems of shifting. In this
admirable book which, like so many of the recent works
by Italian writers, fairly staggers the reader with its wealth of
material and evidences of wide reading Professor Conigli-

1 " Un' imposta di data intensity ed estensione, tanto meno intensamente ed
estesamente incisa su alcune economic, e lo e tanto meno disegualmente sulla
societa economica complessiva quanto piu questa e evoluta. L' incidenza poi,
quando essa non abbia una considerevole estensione ed intensita, assume tanto
meno facilmente il carattere di un mutamento nell' attivita, quanto piu la societa
e progredita. Infine il mutamento nel consumo si awera con tanto maggiore
violazione dell' equilibrio dei gradi di soddisfazione dei bisogni, e quindi con tanto
minore alterazione dell' ordinamento interne dell' economia individuale, quanto
piu progredito e 1' ambiente sociale, in cui si immagini il mutamento di imposta."
Ibid., p. 276.

2 La Reforma delle Leggi sui Tributi Locali. Da C. A. Conigliani. Modena,
1898, 751 pp.

172 Shifting and Incidence of Taxation

ani comes to close quarters with some of the difficult ques-
tions of incidence. But here he abandons the mathematical
method, and treats the problem very much from the same
point of view as his compatriot Graziani. 1 The only Italian
writer to follow the lead of Cournot is Major Barone, who
substitutes diagrams for algebraic formulae. He has pub-
lished a succinct but very suggestive essay 2 on some funda-
mental theorems in the pure theory of taxation, working out
in mathematical form some of the points referred to in the
following pages.

Among recent English writers, we turn naturally to the
two leaders of economic thought, Professors Marshall and
Edgeworth. The former has called attention to the con-
nection between the doctrine of incidence and the general
law of value. Although he has reserved the fuller study of
the shifting of taxation for the second volume of his great
work, his incidental treatment of the topic has already
enriched the discussion with some profound remarks and
some interesting diagrams. 3

Professor Edgeworth has treated the general subject in a
series of recent articles. 4 He discusses the abstract theory
with all the force of reasoning, the nicety of distinction and
the acuteness of criticism to which the readers of his other
works have become accustomed. His presentation discloses,
perhaps even better than that of Cournot, the strong and
also the weak points of the mathematical method. While
we shall often have occasion to refer to the substance of Pro-
fessor Edgeworth's remarks hereafter, this is a convenient
place to say a word about the mathematical method in general.

To the reader who understands the higher mathematics,

1 See above, p. 160.

2 " Di alcuni Teoremi Fondamentali per la Teoria Matematica dell' Imposta."
Da Enrico Barone. In the Giornale degli Economisti, seria seconda, anno v
(1894), pp. 201-210.

8 Principles of Economics. By Alfred Marshall. London, 1890. 3d ed.,
i895,pp. 519, 523, 535.

* " The Pure Theory of Taxation." By F. Y. Edgeworth. In the Economic
Journal, vii (1897), pp. 46-70, 226-238.

The Mathematical Theory 173

the hypothetical principles of the influence of tax on price
can be illustrated with a degree of refined precision that is
eminently satisfactory. But this advantage is occasionally
secured at a heavy cost. While the intricate algebraic for-
mulae may be worked out with perfect exactitude, the slightest
flaw in a single symbol may invalidate the whole conclusion.
Furthermore, the mathematical study of the pure theory often
assumes a simplicity of condition which does not actually
exist ; it purposely neglects the all-important element of fric-
tion, and constructs hypotheses irrespective of their agree-
ment with the facts of actual life. If, as sometimes happens,
these hypothetical results are applied to the conditions of the
market-place, the results are likely to be unreal. Within
narrow limits, the mathematical treatment of incidence is
exceedingly valuable, but except where diagrams are em-
ployed, it is apt, perhaps, to be of greater value to the writer
himself than to the reader. In fact, the chief advantage of
the mathematical method is seen in the use of diagrams,
where an intricate point which involves the simultaneous
consideration of several causes can be illustrated with greater
brevity and clearness than in any other way. But when we
proceed from diagrams to the higher algebra, the use of the
mathematical method sometimes leads to refined calculations
of more importance to the mathematician than to the econo-
mist, and of little perceptible use in solving any practical
economic problems. It may even be doubted whether the
mathematical method has independently discovered any
important principle susceptible of practical application that
could not have been also expressed in every-day language.
That it has not preserved its votaries from error is evident
from Cournot's unhappy treatment of the mathematics of
international value. That it sometimes leads to results which
are likely to divorce still more the economics of the closet
from the economics of the market-place may be illustrated by
a slip of Mr. Edgeworth himself. 1

1 See the extended mathematical proof (in the Economic Journal, vii, pp.
230-232) of the proposition that a tax on first-class railroad tickets will reduce

174 Shifting and Incidence of Taxation

It has usually happened, however, that most of the mathe-
matical economists have been at the same time distinguished
thinkers, who have been able, as in the case of Professor
Edgeworth, not so much because of their mathematics l as
because of their power of keen analysis, to illumine many a
dark corner of pure theory. It is not surprising, then, that
to the mathematical economists we owe some of the ablest
contributions to the subject of the incidence of taxation.

Our long and tedious task has come to a close. The sub-
ject of the incidence of taxation, as we have seen, was one of
the earliest to engage the attention of writers on economic
questions ; and because of its difficulty, as well as of its
importance, it has remained a favorite topic for modern
economists. The writers prior to Adam Smith, with a few
distinguished exceptions, considered only a single phase of
the larger problem, and attempted to connect their discussion
with some pending measures of actual legislation. The his-
tory of their views is of interest primarily as containing the
germs of future doctrines. Beginning, however, with the
Physiocrats and Adam Smith, we meet broader principles
based on fundamental theories of the new economic science.
The Physiocrats spoiled their doctrine of incidence by accept-
ing certain peculiar views on the nature of wealth and the

(not increase) the price of the tickets of all classes. The mathematics which can
show that the result of a tax is to cheapen the untaxed as well as the taxed com-
modities will surely be a grateful boon to the perplexed and weary secretaries
of the treasury and ministers of finance throughout the world !

1 The average man will agree with Jowett, who writes to a correspondent : " I
hope that you will not . . . write anything that is not perfectly intelligible and
which cannot be expressed in words without symbols. You remember that I was
always an enemy to the mathematical formulae. (You) will reply that I do not
understand them, which is very true. But ... I think that all attempts of any
kind to express ideas by numbers and figures have failed and will always fail
because they are not in part materia things indefinite cannot be measured by
things definite, though they may be sometimes illustrated by them." The Life
and Letters of Benjamin Jowett. By Abbott and Campbell. 1897, " PP- 3*5' 3 l6 -
For the other view, see Edgeworth, Mathematical Physics, 1881; and the same
author's address " On the Application of Mathematics to Political Economy," in
the Journal of the Royal Statistical Society, Hi, part i, pp. 538-576.

The Mathematical Theory 175

principles of production. Adam Smith and Ricardo here, as
almost everywhere else, disclosed the real starting-point of
the inquiry, and gave the true direction to future investiga-
tion. Their doctrines need, indeed, to be rounded out, and
in part corrected; but this is true only to the extent that
their theories of economics in general are in need of the
revision that they have received in recent times.

The acceptance of the doctrines of Adam Smith and
Ricardo on the subject of incidence was retarded by two
peculiar theories which long claimed the attention of stu-
dents. The equal-diffusion theory, as we have seen, was
developed primarily by French writers, although it soon
spread to other countries, and at one time appeared to be
in almost complete possession of the field. It owed its
popularity chiefly to its seeming simplicity; and it was
welcomed by the conservatives as a defence of the existing
social order. But a few acute thinkers, as we now know,
recognized that the theory was susceptible of a pessimistic,
as well as of an optimistic, interpretation ; and with the new
weapon of attack now given to the radicals, the popularity
of the doctrine waned. Its total disappearance, however,
was due to the fact that the essential weakness of the
premises was gradually recognized. The other doctrine
which, for a time, engaged attention was the capitalization
theory. This was, however, applied primarily to the consid-
eration of the land tax, and never entirely supplanted the
older classical theories in general.

The great mass of writers with whose views we have
become acquainted continued to discuss the subject in a
more or less conventional manner. Some of them, as the
members of the eclectic school, made certain valuable sug-
gestions; and we can notice almost from decade to decade
an increase in the breadth of view and in the attention to
points neglected by their predecessors. But the new theo-
ries of distribution had not yet been worked out, and the
results, therefore, were only partly satisfactory. Two minor
theories that next presented themselves were the rather de-

176 Shifting and Incidence of Taxation

spairing doctrine of those who regarded the problem as too
intricate for any satisfactory solution, and the more self-
satisfied theory of those reformers who considered that they
had discovered the real social bearing of the doctrine of
incidence. A real and lasting advance, however, was made
by the writers who addressed themselves primarily to the
quantitative relations of pure theory and who, in part at
least, based their conclusions on mathematical processes.
But here again the very welcome and timely insistence on
the general principles of pure theory was attended with some
drawbacks. On the one hand, many of the writers seem to
have considered pure theory as synonymous with the theory
of normal law under static conditions and thus neglected the
element of friction or the working out of economic law under
dynamic conditions. In the second place, many authors
contented themselves with stating these normal laws of in-
cidence in general, with only a passing illustration here and
there. Little attempt was made to take up the most impor-
tant existing taxes in turn, and to trace their incidence in
detail.

There still remains, then, a task to be accomplished. Not
that a complete revolution or reconstruction of the doctrine
of shifting is necessary or possible. Much nay, by far
the greater part of the doctrine has come down to us in
a systematic development from the original theories of the
founders ; but here and there excrescences are to be lopped
off, gaps are to be filled. The newer theories of distribution
require in part a recasting of the doctrine of shifting ; while
a due regard to its practical importance justifies a restate-
ment of the whole subject, which, while by no means in-
attentive to the purely theoretic aspects of the topic, shall
endeavor continually to bear in mind their application to the
problems of actual life.

PART II
THE DOCTRINE OF INCIDENCE

CHAPTER I
GENERAL PRINCIPLES

THE problem of the shifting of taxation is primarily a
question of prices. To solve it is to discover whether, and
to what extent, the imposition of a tax effects changes in the
revenues and the expenses of individuals ; in other words, to
ascertain which of the two parties to every economic trans-
action the buyer and the seller bears the burden of the
tax. This is obviously not the same as saying that we are
dealing only with the relations between the producer and
consumer. The vendor may, indeed, be a producer ; but he
may also be an owner who has acquired the commodity with-
out producing it. Whatever these relations may be, the
essence of the inquiry is : Are prices raised, and if so, to
what extent are they raised? Whether we deal with the
prices of consumable commodities, of capital, or of labor,
this is always the nature of the problem.

It is readily perceived, therefore, that the theory of the
shifting of taxation is a part of the wider theory of value, and
that a comprehension of the facts of incidence depends on
an application of these laws of value. But the laws of value,
as is now well recognized, deal primarily with the more or
less subtle changes caused in the supply of, or in the demand
for, commodities. Even the cost of production, which plays
so fundamental a part in economic progress, affects price
through the medium of changes in the relations of supply
and demand. Our concern, then, will be not only to mention
those general laws of value which are of especial significance
to the subject under discussion, but also to call attention to
the varying conditions under which these laws work them-

179

180 Shifting and Incidence of Taxation

selves out. In other words, we have to deal not alone with
the "pure theory," but also with those phenomena of friction
which impede the action of the general laws and are of funda-
mental importance in any application of the doctrine to the
affairs of real life.

If we take the simplest case of a tax imposed on some
commodity, the ordinary result may be pictured somewhat
as follows :

The tax must evidently at first be regarded as an increase
in the cost of production. For the time being, and until the
old stock is exhausted, those who produced before the new
tax was imposed are benefited to the extent of the ultimate
rise in price. But as soon as this interval has elapsed, all
producers are on the same footing. Since the tax is an addi-
tion to the cost of producing the article, they will seek to
recompense themselves by raising the price. Unless they
succeed in this, their profits will be curtailed and the pro-
duction of the article will diminish. For one of two results
must ensue : either producers will gradually transfer their
capital to untaxed industries, or, even if the transfer of
capital is impossible because it is firmly fixed in the indus-
try, production will be curtailed by the crowding out of those
who were previously on the very margin of profitable pro-
duction, while the tax will prevent the influx of any new
capital. In either case, then, in the 'long run, the supply
will decrease ; and this diminution, provided the commodity
continue to be produced at all, will involve an increase of
price. The consumer will, therefore, bear the burden of
the tax.

This seems to be a very simple process. Not a few have
even supposed that this description exhausts the study of
incidence. The extent, however, to which this is actually
true, and therefore the extent to which such a tax will be
shifted to the consumer, depends on a number of important
considerations, inattention to which will vitiate not only any
theoretical conclusions as such, but also their application to
the facts of every-day life.

General Principles 181

In the application of the general law of value to taxation
the chief considerations are as follows :

1. Is the commodity durable or perishable ?

2. Is the commodity subject to the law of monopoly or
that of competition ?

3. Is the tax general or exclusive ?

4. Is there complete mobility of capital ?

5. Is the demand for the commodity elastic ?

6. To what extent do differential advantages of produc-
tion affect the supply ?

7. Is the article supplied at a constant, an increasing or
a diminishing cost ?

8. Is the tax imposed on margin or on surplus ?

9. Is the tax large or small ?

10. Is the tax proportional or graduated ?

11. Is the commodity a final good or merely an inter-
mediate good?

These considerations may now be treated in order.

I. Is the Commodity Durable or Perishable?

On this distinction depend the phenomena of what is called
the capitalization or the amortization of taxation. This prin-
W ciple may be expressed as follows :

When a special tax is imposed on any one class of com-
modities to the exclusion of all others, the tax will, under
certain conditions, fall entirely on the original owner of the
commodity that is, on the one who owned it before the tax
was imposed and not on the future purchaser ; for the tax
will be discounted through a depreciation of the capital value
of the article by a sum equal to the capitalized value of the
tax. For instance, if the ordinary return on investments is
five per cent, and if a tax of one per cent is imposed on all
railway bonds, the price of these bonds will fall from par to
eighty. The new purchaser will really not bear the weight
of the tax; for although his net return on each bond of a
hundred dollars will be only four dollars, he will still make

1 82 Shifting and Incidence of Taxation

five per cent on his investment. Four per cent of one hun-
dred is the same as five per cent of eighty. In the same way,
when unequal taxes are levied on different classes of com-
modities, the excess of the tax on the overtaxed commodity
above the general rate will be capitalized, so as virtually to
exempt future owners from this differential burden. The
tax, then, will fall on the original owner, whose property will
be diminished in value by the capitalized equivalent of the
excess of taxation. On the contrary, when a special tax is
levied on such commodities at a lower rateythan that already
imposed on other classes, the deficiency in the tax will be
capitalized in a sum which will be added to the value of the
property in the hands of the original owner. To use our
preceding illustration, let it be assumed that all railway bonds
are taxed one per cent and sell at eighty. If the tax on the
bonds of a single railway company is for some reason perma-
nently reduced to one-half of one per cent, these particular
bonds will rise in price to ninety. In this case the original
owner, and not the purchaser, will benefit by the reduction
or the remission of taxation, just as in the preceding case the
original owner, and not the purchaser, suffered from the tax.
Where the value of the commodity diminishes, the term
" amortization of taxation " seems suitable ; where the value
of the commodity increases, the phrase " capitalization of tax-
ation " is preferable. Both phenomena show the results of
the working out of the same principle.

The question now arises : Under what conditions will this
phenomenon appear? In answering this question due im-
portance must be assigned to the following five conditions :

A. The tax must be an exclusive or an unequal tax.

B. The tax must be levied on a commodity which has
a capital value and is capable of having an annual rental
value.

C. The tax must be levied on a commodity of so pro-
tracted a consumption period that several annual payments
are expected to be made.

D. The tax must not be susceptible of being shifted to

General Principles 183

the consumer by the fact that the commodity is used in fur-
ther production.

E. The general relations of demand and supply must
remain in other respects the same.

j In the first place, it is clearly necessary to assume in-
equality of taxation. If there is no excess, there is nothing
to be capitalized. The theory applies only to taxes which
are exclusive, or which exceed other taxes by a definite
amount. Inequality of taxation is the corner-stone of capi-
talization.

v Secondly, the commodity must have a capital value which
is susceptible of diminution. This would, for instance, hold
true of land; in fact, we have seen that the whole theory
arose from a consideration of the land tax. 1 It is equally
true, however, of any other commodity whose market value
is nothing but the capitalized rental value, the capitalization
being fixed at so many years' purchase. But the principle
cannot apply to taxes on income in general, or to taxes on
wages, or to poll taxes, because in these, and in all similar
cases, there is no capital value that is subject to amortization
or capitalization.

3 Thirdly, the commodity in question must be relatively dura-
ble in character. This consideration is of such cardinal impor-
tance that we have put it at the heading of this whole section.
When we speak of a tax, we may mean either a single payment
or a more permanent annual payment. If the tax consists of
one payment only, as in the case of the federal so-called direct
tax during the Civil War, there is no opportunity for capitali-
zation. Again, if the commodity is of so ephemeral a nature
that it will be consumed before the tax hits it a second time,
there can obviously be no capitalization. This is the case
with the so-called indirect taxes on commodities. If a tax is
imposed on a barrel of flour, it will ordinarily be shifted to
the consumer. But if the commodity is so durable that it
may be subject to repeated taxes, and if the taxes are levied
at about the same rate from year to year, the anticipated

1 See above, pp. 137 et seq.

184 Shifting and Incidence of Taxation

annual payments may be lumped together in such a way as
to cause a change in the capital value of the thing taxed. If
the special tax covers ten years of the consumption period of
a house, the imposition of the tax on houses depreciates the
value of the house by the present worth of a ten-year annuity.
If the commodity yields a perpetual rental or use as in the
case of a piece of land or of a perpetual bond a special
tax or an unequal tax on this land or bond depreciates its
value by the present rate of a perpetual annuity. The more
durable the commodity, the greater the chance of capitali-
zation.

Fourthly, the principle will not apply if the tax is imposed
on a commodity which is to be used in further production,
where the tax will simply raise the price of the product,
instead of lessening the value of the principal or source of
the product. Thus an exclusive tax on iron used for making
tools may result in an increased price of iron tools and may
be shifted onward to the consumer. If by the shifting of a tax
we mean its transfer forward to some one else, capitalization
is the opposite of shifting. If a tax is shifted onward, it
cannot be capitalized ; if it is capitalized, it cannot be shifted
onward. Capitalization implies a depreciation of the capital
value ; and this is possible only when the tax rests on the
initial possessor that is, when it is not shifted onward to
any one else.

On the other hand, if we extend our conception of shifting
to include the process of shifting backward, as well as that
of shifting forward, we might call capitalization a kind of
shifting. For, as we have just seen, the new purchaser who
continues to pay the tax from year to year does not bear it,
but in one sense shifts it back upon the initial possessor.
He pays the tax indeed; but he has already deducted from
the purchase price a sum equal to all the future taxes which
he expects to be called upon to pay. The difference between
his case and that of a dealer who shifts a tax on commodities
back to the producer instead of forward to the consumer is
that, in the latter case, the tax is levied only once on a com-

General Principles 185

modity destined to immediate consumption, while in the for-
mer case a whole series of payments is levied on a durable
commodity. In the one case we have the shifting back of a
single tax ; in the other case we have the shifting back
of a whole series of taxes. For capitalization implies a
change in price equal to the capital value of all anticipated
payments.

Finally attention must be called to the fact that the prin-
ciple sometimes seems to the careless observer to be robbed
of practical importance, as in the case of special taxes on
property or on profits, where the capital value of this class
of commodities for any reason fluctuates in price. For ex-
ample, if a special tax were levied on government securities
it might nevertheless happen that, for some reason, general
confidence in government bonds might increase to such an
extent as to counterbalance the decreased returns from the
investment. In such a case, although there would obviously
be a capitalization of the tax, the process would be obscured,
and there would be no final diminution of capital value.
Again, in the case of a special tax on land, the value of land
as an investment might nevertheless for some reason in-
crease. This also would impair the easy recognition of the
principle; the decrease in price due to capitalization of the
tax would be counteracted by the increase of price due to
changes in demand. , Yet, although the price has remained
the same, capitalization has obviously taken place ; for had
no tax been imposed, the price of the bonds or of the land
would have risen instead of remaining stationary. The pro-
cess of capitalization always results in actual diminution of
capital value, if by value we mean the price as fixed by the
equation of demand and supply. In the absence of disturb-
ing causes which suddenly change this equation, the process
is naturally a simpler one. But in every case, subject to the
conditions laid down above, it remains true that the increase
of an exclusive tax results in a partial confiscation, and that
its decrease is tantamount to a free gift.

With all these qualifications, the capitalization of taxation

1 86 Shifting and Incidence of Taxation

remains an important topic in the study of incidence. Its
cause is inequality ; its result is confiscation or gratuity.

2. Is the Commodity subject to the Law of Monopoly or to
the Law of Competition ?

From the point of view of pure theory, this distinction is
vital ; indeed, the most recent formulation of the law of value
makes a sharp line of demarcation between the regime of
monopoly and that of competition. In the domain of prac-
tical life, also, the distinction is of great importance, for the
number of commodities subject to the regime of monopoly
in modern times is great and growing. It is, indeed, true that
the cases of a natural monopoly are perhaps not more numer-
ous in modern times. Not only, however, do we find more
and more legal monopolies, through the protection of indus-
tries by patents and copyrights, but it is a familiar fact that
there has been a great increase in the number and signifi-
cance of the so-called economic monopolies, those indus-
tries where through the working out of economic law the
tendency is toward an ever greater concentration of capital,
gradually shutting out the existence of competition, until
finally we reach the stage of complete monopoly. The
familiar examples of this are, first, the so-called municipal
monopolies, gas, water, electric light, street railway busi-
ness; secondly, occupations like the railroad and express,
the telegraph, the telephone ; and thirdly, the host of modern
enterprises which are assuming the form of trusts.

The fundamental difference between the regime of monop-
oly and that of competition is, that in the former case price
is not fixed by the cost of any marginal product. The impor-
tant consideration here is that a monopolist fixes the price at
the point that will yield the largest net return, and that he
will limit the production to such an amount as will afford
him this maximum monopoly revenue. He differs from the
producer under competitive conditions in that he controls
the supply. From this fact result such important differences

General Principles 187

in the law of shifting that in almost every succeeding state-
ment of principle it will be necessary to distinguish between
the conditions of monopoly and those of competition.

3. Is the Tax General or Exclusive?

In almost all the writings on incidence, the particular tax
under discussion is assumed to be special or exclusive. For
purposes of pure theory, this assumption is legitimate, nay
even necessary ; for it is only through isolation that we can
get a clear picture of the working of any single force. But
it has not infrequently happened that results, laboriously
attained as hypothetically true, have been at once applied
to conditions under which the hypothesis is no longer valid.
We may, for example, study the effects of a particular tax,
like that on houses, and reach conclusions which are correct
on the assumption that the tax is the only one ; but in actual
life, the house tax may be only one of a series of taxes, and
this fact may at once invalidate our nicely calculated results.
Other things being equal, the more general a tax, the narrower
the taxless field to which the persons concerned can migrate ;
the less general the tax, the greater the chance that the tax
will be shifted.

4. Is there Complete Mobility of Capital?

The ordinary theory is that when capital does not find its
usual remuneration in one occupation, it will be transferred
to another industry where the chances are better. In general,
this hypothesis is valid, because it is based on the principle
of least effort. The economic man may be assumed to
endeavor to secure the greatest returns with the smallest
outlay. He will transfer his capital from place to place, or
from occupation to occupation, according to his opinion of
the chances of profit.

At the same time, there may be obstacles to immediate
transfer. Thus, where capital is firmly fixed, the owner may
lose more by attempting to change it thanf he would gain by

1 88 Shifting and Incidence of Taxation

the transfer. If the capital is unremuneratively invested in
a given industry, there will be no fresh accessions of capital
to it ; and, as the other industries prosper, the relative dimi-
nution of capital in the first industry will, in the long run, be
equivalent to a transfer of capital from it to the more pros-
perous occupation. But, in any given business, at any given
moment, there may be all degrees in the rate of transfer, in
the degree of mobility. At the one extreme lies the stock
exchange business, where the mobility is almost complete;
at the other extreme lie those forms of agriculture in which
capital devoted to improvements is almost entirely irre-
movable.

In addition to this cause of comparative immobility, we
may mention minor reasons, such as the ignorance of the
capitalist, the risk connected with the transfer, social con-
siderations and legal obstacles. 1 Whatever the reasons, it is
obvious that when a tax is imposed on capital in any industry,
the smaller the degree of mobility, the less is the prospect of
shifting, and the slower will be the process.

5. Is the Demand for the Commodity Elastic?

. In the general proposition laid down above, 2 no reference
was made to the conditions of the demand : it was assumed
that demand would remain constant. But this assumption
is obviously not the only possible one. In order fully to
consider the changes in price caused by a tax, we must
therefore regard the situation more closely from the point of
view of the effective demand*

(We speak of the demand for a commodity as elastic, when
a change in price produces an alteration in demand. In such
a case if the price goes up, the demand falls off ; if the price
goes down, the demand increases. 1 There are as many
degrees of elasticity in the demand for various commodities
as there are variations in human wants and in the ability
of men to satisfy those wants. On the other hand, if the

1 See below, p. 267. 2 p. 180.

General Principles 189

demand for a commodity is not variable, the inelasticity may
assume two forms. The demand may be inelastic in the
sense of being constant, so that it always remains the same ;
or it may be inelastic in the sense that any attempted increase
completely destroys the demand. We shall thus have to
consider three possible cases, taking up first, under the heads
A and B, the two forms of inelastic demand.

A. hf the tax is levied on a commodity which the con-
sumers must have and which they are willing to pay for at
any expense, the demand will not decrease. j^With such an
invariable demand the price of the commouity will rise by
just the amount of the tax. J The consumer will thus bear the
whole burden. Practically, this is true of only a few com-
modities. In a large number of instances, however, prices
may rise considerably without greatly affecting the demand.
Such would be the case to some extent, at least, with absolute
necessaries as well as with high-priced luxuries. The demand
for the former is not apt greatly to diminish unless people
starve. The effect of a tax on such commodities would rather
cause a diminution in the more elastic demand for comforts,
or in that for the less absolute necessaries. But the demand
for absolute necessaries depends chiefly on the size of the
population, not on the price of the article, (in the class of
high-priced luxuries,) again] a tax, junless it be utterly exorbi-
tant, (is not likely to restrict consumption to any very great
degree.j Those who are generally willing to buy such luxu-
ries are not quite so likely to be held back by any probable
increase of price as the purchasers with a slightly lower
standard of life. It may, in fact, be laid down as a general
rule that in the case of necessaries, as well as in that of
expensive luxuries, great alterations of price go hand in hand
with slight variations in demand ; while in the case of mod-
erate comforts, small changes of price are accompanied by
considerable variation in demand. 1 In the former case, then,

1 Most writers, like Walras, lenlents d^conomie Politique Pure, 2d ed.,
p. 519, fail to make this distinction, and contrast luxuries in general with necessi-
ties in general. Yet Cournot had already called attention to the similarity be-

190 Shifting and Incidence of Taxation

that of absolute necessaries and some expensive luxuries,
under the imposition of exclusive taxes there will be less
migration of capital from the industries concerned because
profits tend to remain constant. The tax will, in the extreme
case, be shifted in its entirety to the consumer. 1

What is only partly true, however, in actual life, of abso-
lute necessaries and expensive luxuries, applies in a far
greater degree to what are called complementary goods. For
even in the case of luxuries there are generally some pur-
chasers at the margin of doubt, who will be dissuaded from
buying, and who will be tempted to substitute some other
commodity if the price of the article rises. When, however,
as frequently happens in industrial enterprises, we have two
or more commodities which have to be joined in production
to accomplish a desired result, the one supplements the
other, and cannot be disused without serious loss. Familiar
illustrations of such complementary goods are pen, ink and
paper ; needle and thread ; cart and horse ; bow and arrow. 2
Almost every industry on a large scale has its gradations of
such complementary goods. Even here, of course, there is
no insuperable bar to the use of substitutes. But the price
of the complementary goods must rise far higher than would
be the case with an ordinary commodity, before the pur-
chaser will be driven to accept a substitute. Where a tax is
imposed on one of two or more complementary goods, while

tween great luxuries and indispensable necessaries in his Principes Mathematiques,
pp. 162, 163, and in his Principes de la Theorie des Richesses, p. 306.

1 Pantaleoni, Traslazione, pp. 115, 116, asserts that when the limit of effective
demand has not been reached, the tax will be divided between the producer and
the consumer. His argument is that, since the producer's profits are decreased,
he will transfer his capital to other industries. This great addition of capital will
decrease profits all around, in the taxed as well as in the untaxed industries.
Thus, the producer will get less profit than before.

This seems to be a mistake. It is, on the contrary, difficult to see why any
capital should be transferred. So long as the limit of effective demand is not
reached, the producers will not have their profits curtailed, because they can in-
crease the price by the tax. Pantaleoni's argument thus appears to be defective.

* Cf. The Positive Theory of Capital, by E. von Bohm-Bawerk, book iii,
chap. ix.

General Principles 191

the other is exempt, we come very near to the conditions of
inelastic demand. A tax on one of two complementary goods
will thus tend to be wholly shifted to the consumer.

B. We take up next the other case of an inelastic demand,
that, namely/where the price of a commodity before the
imposition of a tax has already reached the limit of the effec-
tive demand, and where an attempt to increase the price by
any portion of the tax would totally annihilate the demand.j
Although ''such cases* are exceedingly rare in practical life,
and represent a theoretical possibility rather than an actual
facty they deserve at least a passing mention. ;The commod-
ity must be sold at the accustomed price, or not at all; the
price cannot rise. ) un such a case the tax cannot be shifted }
the whole weight of the tax will fall on the producer. This
will, in the long run, involve a decrease in production. The
old producers will lose, and no new capital will be invested.
Even if the supply is diminished, however, the price cannot
increase; for, by the supposition, consumers will prefer to
forego consumption rather than pay a higher price. The
net result will be a cessation of production with an interme-
diate loss to the owners of fixed capital in the business.
Under no circumstances can such a tax be shifted.

C. If, thirdly, the (demand is elastic, as in the case of
minor luxuries and of all comforts, that is, of the general
mass of commodities, in the sense that the old price
before the imposition of the tax falls below what some of the
consumers will in an extremity be willing to pay, while the
new price, including the tax, exceeds what a part of the con-
sumers can afford to pay, the tax will be divided between
the consumer and the producers The proportions in which
this division will take place will depend, so far as this ele-
ment is concerned, chiefly on the elasticity of the demand.
The more persistent the demand, the greater is the propor-
tion of the tax which the producer will be able to add to the
price ; the more sensitive the demand, the smaller the sum
by which he will find it profitable to increase the price. In
other words, the greater the elasticity of the demand, the

192 Shifting and Incidence of Taxation

more favorable other things being equal will be the situa-
tion of the consumer.

All changes in price, however, depend ultimately on the
relations between demand and supply. Having just dis-
cussed the variations due to the elasticity of demand, what
shall we say about those due to the elasticity of the supply ?

At the very outset, we may mention those comparatively
insignificant cases in which no increase of the supply is pos-
sible. This would be true of old works of art, of choice
wines of a particular vintage and of similar articles. No
matter what the inducement may be, the supply is inelastic,
since it cannot respond to any increase in the demand.
Under such circumstances, the extent to which the tax will
be shifted to the consumer will depend on the conditions
mentioned above under A and C.

In ordinary cases, however, the supply possesses some
degree of elasticity; but the conditions affecting elasticity
of supply are somewhat more complicated than those affect-
ing elasticity of demand. It may, however, be laid down as
a (general rule\that the /elasticity of supply depends on two
considerations : first, the extent to which differential advan-
tages of production affect the supply of the commodity ; and
secondly, the ratio of product to cost, or the law of return to
which the industry is subject.) When it is said that the
elasticity of supply "depends on" these considerations, no
attempt is made to prejudge the question whether it varies
directly or inversely with these conditions. It is this prob-
lem to which we shall now address ourselves under the sixth
and seventh heads of this chapter.

6. To what Extent do Differential Advantages of Production
affect the Supply ?

The distinction here drawn is between those cases where
all portions of the supply of a given commodity are pro-
duced at practically the same cost, and those cases where a

General Principles

part of the supply is produced at a certain cost, and another
part at a different cost. The nature of this distinction
demands attention before we proceed to the discussion of
incidence.

Ordinarily producers differ either in ability or in oppor-
tunity. While all similar units in the supply of a given
commodity sell at the same price, the superior skill of some
employers, or the more favorable situation of some factories,
or the more fortunate combination of external causes, enables
some capitalists to produce more cheaply than others. If,
now, we assume static conditions; if, in other words, we
assume that both demand and supply remain stationary, that
there is no change in population, and no alteration in the
methods of industry, under such conditions it is clear that
the normal value of the articles will be fixed, not by the
average cost of production, but by the cost of producing
the most expensive unit. In other words, Aiormal value will
then tend to equal the highest cost of production.} So long
as the demand is sufficient to call into existence commodities
produced at different costs, and so long as there is no altera-
tion in relative supply and demand, the price will be fixed by
the greatest cost ; and those who produce more cheaply will
benefit accordingly. As the price is fixed by the cost of
producing the most expensive portion of the supply, the
difference between the lowest cost and actual price, in any
given case, that is, (the difference between the cost of pro-
ducing the article under the most disadvantageous circum-
stances and that of producing it under the more favorable
conditions, constitutes the producer's surplus or profits.)

Under conditions of actual life, however, this assumption
is inadmissible. The real conditions are dynamic, not static.
There is a continual movement going on, not only from the
side of demand, through changes in the population as well
as in the wants of the purchasers, but also from the side
of supply, through alterations in industry. Under such
changing conditions of actual life, the conditions are some-
what more complex.

194 Shifting and Incidence of Taxation

The ordinary course of competitive industry may be por-
trayed as follows. At any given moment, the commodity is
supplied by a number of producers, and sells in the market
at a fixed price. The more efficient producer, or perhaps
some newcomer in the field with more capital or with im-
proved machines or with better facilities for marketing the
product, endeavors to capture a larger part of the market by
putting out an increased supply at a somewhat lower cost of
production. The mere fact of this increase of supply will
tend to depress the price ; and although his percentage of
profit may be smaller than it would have been at the old
price, he expects larger total profits because of his ability to
sell more than before. The increase of supply, at lower
price, must manifestly injure the less efficient producer at
the margin of profitable production. In every business,
there are always some producers who are able just to " make
both ends meet*" Their machinery is antiquated, their capi-
tal has been depleted, their business -activity and knowledge
are no longer what they should be, and their former profits,
if there ever were any, have now vanished. They may con-
tinue for a time to struggle along, hoping against hope, and
may live on their capital, being content to bridge over the
next few years without profit; or, if they have invested
heavily in unsalable buildings and machinery, they may
deceive themselves by a fallacious system of book-keeping,
and through a neglect to charge up the items of depreciation
of stock or machinery, may figure out a nominal profit ; or,
finally, if their buildings occupy a good site, they may count
as profit what is really to be apportioned to rent, and their
gain's will accordingly accrue to them not as entrepreneurs,
but as landowners. But in every case the day of reckoning
is sure to come. Sooner or later the producer will find that
he is getting no return on his industrial capital. He will
cease producing that particular commodity; and his place
will be taken by some more efficient entrepreneur.

All industrial progress consists of a continual change at
the top and at the bottom of the line of producers. Fresh

General Principles 195

capital is continually coming in ; the discouraged are con-
tinually stepping out. Normal value, under dynamic condi-
tions, therefore tends in the direction of cost of production
under the most favorable, not under the least favorable, con-
ditions ; it tends towards lowest cost, not highest cost. The
market price at any given moment is indeed, as before that
is, exactly as under the hypothesis of static conditions
fixed at the point of highest cost ; for at any given moment
there is always some unlucky producer under competitive
conditions who furnishes a part of the supply at cost. Next
year he will be crowded out, and his place will be taken by
some one who can produce at lower cost. What under static
conditions was a part of the necessary supply becomes under
dynamic conditions a part of the actual, but temporary, supply.

In practical life, therefore, competitive profits are dynamic
in their nature. They exist only because at any given mo-
ment some entrepreneurs can produce at a lower cost than
those on the margin, or no-profit level; but this margin, or
no-profit level, is itself continually changing, and, under nor-
mal conditions of progress, is continually receding. A large
class of commodities in fact, all competitive articles are,
then, produced under such conditions that the profits rep-
resent the result of differential advantages of production.
These differences may be summed up under four heads :
differences of situation with reference to the market, dif-
ferences in the possession of improved machines or pro-
cesses, differences in the personal abilities of the producers
and differences in opportunity or luck.

Whenever all the articles in a given class are produced at
the same cost, in fact, the resulting profits are monopoly
profits and not competitive profits. Not only does profitable
production at the same cost imply monopoly, but monopoly
necessarily means production at identical cost. Let us con-
sider the last statement first.

A monopoly may be in the hands of either a single pro-
ducer or a combination of producers. If there is only a
single monopolist, there can obviously be only a single cost

196 Shifting and Incidence of Taxation

for the supply. If there is a combination of producers, the
same conclusion does not, at first blush, seem to follow. There
may be a combination, as a trust or pool, where the original
differences of business ability or of opportunity among the
producers subsist after the formation of the trust. The mere
fact, however, that the least favorably situated producer enters
the trust shows that prices are no longer fixed at the point of
marginal cost, for otherwise he could not secure any profits.
As a matter of fact, the ordinary agreement in a trust or pool
provides for a lumping together of the expenses and the
receipts of all members of the combination, and for an appor-
tionment of profits according to a fixed percentage. Thus,
although there is technically no production of all the units of
the supply at identical cost, economically and so far as con-
cerns the relation of the producers to each other the various
parts of the supply may be said to be virtually produced at
the same cost

In the second place, profitable production at the same cost
implies, in the long run, a monopoly. It may conceivably
happen that in a regime of competition all the producers at
a particular moment are men of precisely the same abilities,
and subject to the same conditions. In this possible case
which is apt to be true only of newly started industries
there would, indeed, be only one identical cost for all units of
the supply. There could then, however, not be any perma-
nent profits to all the producers, because prices could not
permanently remain above the mere cost of production. If
there were profits to all the producers, competition would
induce one of them to lower the price in the hope of securing
larger profits through greater sales ; or, if he did not do so,
some new producer would enter the field and cut prices.
The only way in which prices could be permanently kept
at the old figures would be through some control of the
supply. As soon as this condition came to pass, however,
we should no longer have free competition, but should be in
the presence of some form of monopoly. Thus not only does
monopoly imply production at the same cost, but production

General Principles 197

at the same cost involves some form of monopoly. 1 Com-
petitive profits, on the other hand, as we have seen, imply
varying costs of production.

In some competitive industries, however, the differential
advantages are far greater than in others. Obviously, when
these differential advantages are great, profits are high for
the more efficient producer; when they are small, there is
only a slight margin of profit. The older the industry, or
the simpler the conditions of production, the smaller is likely
to be the margin of profit. Furthermore, it must be remem-
bered that where there are great differential advantages of
production, profits are high because of the margin between
the lowest cost of the most efficient producer and the price
fixed by the supply of the least efficient producer. In case
there are no differential advantages of production which,
as we have seen, tends to be true only of monopoly profits
are high because of the complete control of supply. The
existence of profits depends here not upon any competitor,
but upon the conditions, of maximum monopoly revenue
that is, upon the elasticity of the demand and the ratio of
product to cost.

Let us proceed now to discuss the influence of these condi-
tions upon the incidence of taxation in industries subject to
the law of competition.

The fact that high profits or moderate profits accrue to the
more favorably situated producer depends, as has just been
seen, upon the differences in the cost of producing the various
parts of the actual supply of a commodity. 2 If all the incre-

1 Pantaleoni, Traslazione del Tributi, who bases his treatment of the taxation
of profits on what appears to be an exaggerated distinction between ordinary
profits and surplus profits, fails to recognize the fact that industries in which all
the articles are produced at the same cost are necessarily monopolies. Graziani,
Instituzioni di Scienza delle Finanze, pp. 342-344, seems unhesitatingly to follow
Pantaleoni in these points.

2 Professor Carver, in his interesting article on " The Shifting of Taxes " which
was published in The Yale Review, v (1896), p. 266, calls attention to this point.
He puts the conclusion in somewhat different language, in saying that " the elas-
ticity of the production or supply depends upon the extent to which rent enters
into the production of the article in question." By rent he obviously means the

198 Shifting and Incidence of Taxation

ments of the supply are produced at a cost which varies but
little from the market price, not only will all profits be small,,
but any appreciable increase of cost due to the imposition of
a tax will tend, ordinarily, to bring about a diminution in the
amount produced, because it will trench on the narrow margin
between cost and price. A tax will be likely, therefore, by
limiting the supply, to raise price. Under such conditions,
the consumer will tend to bear more of the burden.

On the other hand, if the margin between cost and price is
considerable, and if the more favorably situated producers
earn large profits, a tax will bring about a relatively smaller
decrease in supply, and the augmentation of price to the
consumer will tend to be less. In such cases, since the
margin between the price and the cost for the most favorably
situated producer is so great, the influence of the law of
increasing cost, referred to in the next section, 1 will not be
felt to such a degree at first ; that is, there is greater likeli-
hood that the more capable producers will be able to fill the
gap caused by the cessation of production on the part of the
less efficient producers. There may even be no decrease at
all in the supply, the only difference being that the level of
marginal cost is now, with a part of the tax added, a little
higher than before. The effect of a tax may then be to ruin
the less efficient producers, although the more favored pro-
ducers will no doubt also have their profits somewhat cur-
tailed; but a smaller part of the tax than before will be
shifted to the consumer.

It was stated above 2 that the/elasticity of supply depends
not only upon the extent to which differential advantages of
production enter into the supply, but also on the ratio of
product to cost.j Having discussed the first condition, we
come now to the second.

result of differential advantages of production. Professor Carver's statement is to
be criticised, however, because of his inattention to the other point which affects
elasticity of supply namely, the ratio of product to cost which is discussed
below.

1 Below, p. 202. 2 See p. 192.

General Principles 199

7. Is the Article supplied at a Constant, an Increasing or a
Diminishing Cost?

; It is well known that in certain occupations, or under given
conditions, every successive application of capital or labor
gives returns of approximately constant amount.) The prod-
uct is then in exact ratio to the amount of caprtal or labor
applied, and the industry is said to be subject to the law of
constant returns. The normal value of an article which is
thus reproducible at a fixed cost tends to be equal to the
cost of production.

/In certain occupations, however, every successive applica-
tion of capital gives returns, not of the same, but of a con-
tinually smaller amount.! ( The industry is then said to be
subject, to the law of diminishing returns,) or of increasing
cost. (This condition is ^normally true of agriculture, and
forms me basis of the Ricardian law of rent.) How far it
is applicable to industry in general after a certain stage of
profitableness has been passed, we shall see in a moment.
On the other hand, the industry may obey, up to a certain
point, the law of increasing returns or of diminishing cost.
For instance, where in any industry the proportion of fixed
or constant expenses to total expenses is large, a consider-
able increase of production can often be made without a
corresponding increase of cost. Successive applications of
capital and labor thus tend to produce returns which are, to
a certain point, increasingly greater in amount. The prod-
uct is not proportional, but progressive.

Although this conception of the laws of constant, increas-
ing and diminishing returns is an old one, their application
to the facts of actual life is often misunderstood. The law
of constant returns is generally assumed to be the normal
law, while the laws of increasing and diminishing returns are
supposed to be the exceptions. (A more careful consider-
ation, however, shows that in ordinary competitive enter-
prises the law of diminishing returns is the normal la
This has usually been recognized as true of agriculture ; but

2OO Shifting and Incidence of Taxation

it is equally true of other occupations. In order to show this
clearly, let us examine somewhat more closely what is the real
import of the laws of diminishing and of increasing returns.

The action of the law of diminishing returns manifests
itself in two ways. The fact that after a certain point has
been reached production does not respond proportionately to
the energy applied, and that every new " dose " of capital
and labor gives less and less returns, is familiar to all
engaged in ordinary agricultural operations. The soil may
be prevented from deterioration by the skilful use of
manures ; it may even be improved through the discovery of
newer methods of cultivation ; but the point must soon come
when the increase of production will be overtaken by the
increased application of capital and labor, and when the
returns, as compared to the expenditure of capital and labor,
will diminish. The second way in which the law may work
itself out is generally illustrated by a mine. Here, although
the returns may seem to be constant from year to year, the
capital itself which yields the returns is being slowly con-
sumed. At the end of a given period, not only will the
returns themselves abruptly stop, but the possibility of secur-
ing additional returns in the future will also have disappeared.
We must, therefore, abstract from each recurring return a
sum which, when capitalized at the rate of production, will
ultimately amount to the total original capital. Translated
into ordinary business language, we must allow for depre-
ciation of stock or plant a depreciation which, when con-
tinued long enough, will entirely consume the initial capital.
In the first case of diminishing returns, then, typified by
agricultural land, the actual produce becomes yearly less ; in
the second case, illustrated by mining or badly conducted
forestry, the nominal produce may remain the same, but the
actual return on the investment of capital becomes con-
tinually smaller. In both cases, therefore, the cost is a
proportionately increasing one.

When we take up the law of diminishing cost or increasing
returns, we likewise find that it assumes two forms in ordi-

General Principles 201

nary industry. The one great cause of increasing returns is
what may be termed concentration ; the other may be termed
natural selection. How do these operate ?

The economies of production, due to the concentration of
smaller enterprises into a large concern, have been made
familiar in recent years. In all enterprises where the invest-
ment of capital is considerable, the proportion of constant
expenses to variable expenses is apt to be large. Some
expenses necessarily grow with every increase of business;
other expenses remain the same, whether the business is large
or small. In fact, certain expenses will be actually smaller
with large transactions concentrated into one hand, than with
an equal amount of transactions distributed through a variety
of producers. Up to a certain point, then, it is possible that
an increase of capital and labor will give more than propor-
tionate returns. We say, up to a certain point, because we
must assume that here also a time must come when the law
of diminishing cost loses its efficacy ; for we should otherwise
get the absurd result of production without any cost at all.

But concentration is not the only cause of increasing
returns. There is, under competitive conditions, as we
pointed out above, a continual tendency for the less efficient
producer to be crowded out by the more efficient. The
marginal producer he who is just able to keep his head
above water is, under ordinary conditions of industrial
progress, thrown back into the ocean of failure and despair ;
his place is taken by a more successful competitor, a new
marginal producer who, for a time, continues to exist because
he can produce more cheaply, but who is himself soon forced
to succumb. This continual weeding out, to change the
metaphor, of the unfortunate or the incompetent is equivalent
to the process of natural selection. The community gains,
because it enjoys the services of the more efficient producer;
and this greater efficiency shows itself in the increasing ratio
of output to every new investment of capital. Thus, where
industry is not stationary or retrograding, the natural selec-
tion of entrepreneurs means production at a diminishing cost.

2O2 Shifting and Incidence of Taxation

i

If we attempt now to analyze the facts of actual business
life, we shall find that the forces which make for diminishing
returns and those which make for increasing returns are
combined in different proportions in various enterprises.
Upon the extent to which they are combined depends the
trend toward monopoly or toward competition.

Suppose, for instance, that in any enterprise the economies
resulting from concentration, and the lower cost due to natu-
ral selection of the producers, are just about counterbalanced
by the difficulties of securing additional room for production,
or by drawbacks connected with the marketing of an increased
output. In such a case, where the forces making for in-
creasing returns and those making for decreasing returns are
evenly balanced, the result will be production according to
the law of constant returns. Under such conditions, how-
ever, there is no obvious reason why the more efficient pro-
ducer will not be able to increase his output and thus gradu-
ally to crowd out his less efficient competitors until he secures
a monopoly. Although he produces at constant cost, and
his percentage of profit remains the same, his total profits
will grow with the increase of production. There is no rigid
limit to the increase of output; the more efficient the pro-
ducer, the greater the ease with which he will be able to
command sufficient additional capital to expand his business.
The law of constant cost, therefore, presupposes an industry
on the high road to monopoly.

Suppose again that, instead of being subject to the action
of' the law of constant returns, the industry obeys the law of
increasing returns or diminishing cost. Here it is plain that
the trend will be still more strongly toward monopoly. Un-
less the returns are unequally increasing, so that the less
favorably situated producer can still hold- his own with the
more fortunate producer, and thus continue to furnish an
actual part of the supply, the more efficient producer will
quickly more quickly than in the preceding case gain
control of the market. When the conditions are such as
to realize the economies of natural selection, the tendency

General Principles 203

toward monopoly is a strong one. When the economies of
natural selection are joined to those of concentration, the
tendency toward monopoly is accelerated. It is precisely
because in modern times the forces working toward diminish-
ing returns have, in so many instances, been overtaken by
man's mastery over nature that we notice the well-defined
movement toward trusts, pools and combinations.

It is plain, then, that the law of constant returns, and still
more the law of increasing returns or diminishing cost, is
unfavorable to the persistence of competition. The normal
law of competitive industry, under static conditions, is the
law of diminishing returns or increasing cost; and even
under conditions of actual life that is, under dynamic
conditions a competitive industry may be said to obey
the law of constant or of increasing returns only during a
period of transition. Constant returns and, to a still greater
extent, increasing returns or diminishing cost, tend toward
monopoly. It is only at a given time, and in a given industry
which is in the process, slow or fast, of being monopolized,
that the laws of constant or of diminishing cost can prevail.
When once the complete monopoly has been reached, the
industry may obey the law of diminishing, constant or in-
creasing cost according to the conditions of the particular
case. But the chances of the continuance of the monopoly
will be more secure when it obeys the law of constant cost
rather than of increasing cost or diminishing returns ; and
they will be still more secure when the monopoly obeys the
law of diminishing cost or increasing returns.

If we now extend this analysis to the subject of inci-
dence of taxation, we shall see that the action of the laws
of diminishing and increasing returns differs according as
we deal with cases of competition or of monopoly. The
elasticity of the supply is affected in opposite ways by the
ratio of product to cost, according as the industry obeys
the law of monopoly price or of competitive price. Let
us proceed to show this in detail, taking up first the case of
monopoly.

2O4 Shifting and Incidence of Taxation

If a monopolized industry is subject to the law of constant
returns so that the cost of production is the same for all,
irrespective of the quantities produced, the first tendency of
the producer will be to add the entire tax to the price. But
as this would, in the normal condition of an elastic demand,
decrease sales he will increase the price by something less
than the full amount of the tax. If the demand falls off
greatly with every increase of price or, in other words, if
the margin of effective demand is small the price, as we
have seen, will be increased by much less than the amount
of the tax, and the producer will suffer most of the loss.
Conversely, if the demand is not so elastic, if an increase
of price will produce only a small decrease of demand, a
larger proportion of the tax will be added, and the consumer
will suffer more than the producer. 1 But so long as there is
a given decrease of the demand, the increase of price will
bear a given proportion to the amount of the tax. The
producer will find his greatest profits even if now reduced
below their old level at a given point of smaller sales at
a higher price.

If, however, an industry obeys the law of increasing returns
or diminishing cost where each increment in the amount
produced costs less than the last the tendency of the pro-
ducer, in the face of an elastic demand, will be to add less
of the tax to the price than in the preceding case of constant
returns. For, as soon as he adds any given part of the tax
to the price, he will normally decrease consumption. But,
if he produces less, each unit will, on the supposition that
he has been producing under conditions of increasing returns,
cost him, exclusive of the tax, more than before. The less
he produces, the greater will be his percentage of cost. The
attempt to add more than a given part of the tax to the price
will be doubly disastrous to him ; for not only will his sales
fall off, but his percentage of cost will increase on the actual
sales that he still makes. In the preceding case of constant
cost the producer who has advanced the tax will increase his

1 For a formal proof of this see below, pp. 276-278. Cf. above, p. 191.

General Principles 205

price only to that point where the smaller sales are compen-
sated by the higher price, so that his net profits will still be
at the maximum. But under the regime of increasing returns
or diminishing cost, the point at which price will find its level
is a little lower down on the scale; for since every curtail-
ment of the market means to him not only reduced sales but
a higher percentage of expenses, he will seek to restrict
the output as little as possible, in order that the proportion
of net receipts to gross receipts may remain at its highest
point.

The producer will thus find it profitable to bear more of I
the tax himself than in the preceding case of constant cost. I
The extent to which he will bear a greater portion of the tax
will depend, given a certain intensity of demand, on the
degree to which cost increases with restriction of output.
The more his percentage of expense grows, the less will he
be tempted to advance the price. If a high tax, for instance,
be imposed on the passenger tickets of 'a railway, subject to
the law of increasing returns, where the most profitable
business happens to be the passenger traffic and where an
increase of fares would mean a perceptible falling off in
travel, the resulting abandonment of several passenger trains
a day would mean a considerable increase of the percentage
of fixed to operating expenses, and therefore a great fall of
profits. The railway will therefore add as little as possible
of the tax to the fare. The less important the passenger
traffic, the weaker will, of course, be the action of the law of
increasing returns, and the greater will be the inducement
for the railway to add more of the tax to the fare. Under
ordinary conditions, therefore, in the case of a tax on a
monopolistic industry subject to the law of increasing re-
turns or diminishing cost, the tendency is that the consumer
will suffer less than in the case of an industry subject to the
law of constant cost.

On the other hand, if the monopoly obeys the law of
diminishing returns or increasing cost where each addi-
tional increment of production costs more than the last

206 Shifting and Incidence of Taxation

the producer will be likely to add more of the tax to the price
than in the case of constant or increasing returns. For
although the increase of price consequent upon the imposi-
tion of any part of the tax will decrease consumption, each
unit of this smaller output will, on the hypothesis that he has
been producing under conditions of diminishing returns, cost
the producer, exclusive of the tax, less than before. His in-
clination to pay less of the tax himself will be strengthened
by the fact that, although the sale of fewer articles at the
higher price may cause a reduction in his gross receipts, the
percentage of profit on the smaller output will be greater, and
will thus yield him higher net receipts. The extent, again, to
which the producer will add more of the tax to the price than
in the case of constant cost depends on the rapidity with
which the percentage of cost increases with every unit of
output.

So much for the regime of monopoly. On the contrary,
when we deal with industries subject to competitive condi-
tions, the relations are just the reverse. We have seen l that
the normal law, in the case of competition, is that of dimin-
ishing returns, and that competitive industries obey the laws
of constant or of increasing returns only in cases of transi-
tion. But for the sake of uniformity we may here again, as
in the former case of monopoly, take the law of constant
returns as the starting-point of our analysis.

The great distinction between competition and monopoly is
that under conditions of competition, although the price of a
commodity continually tends toward the point of lowest cost,
it is fixed at any given moment at the point of marginal or of
highest cost ; while under conditions of monopoly there is no
marginal cost, because there is no marginal producer. The
application to the problem of incidence of taxation is obvious.
If the competitive industry obeys the law of constant cost,
the extent to which a tax will increase the price depends,
other things being equal, primarily on the nature of the
demand curve. The more persistent the demand, the greater,

1 Above, pp. 202-203.

General Principles 207

as we have seen, is the proportion of the tax which the pro-
ducers will be able to add to the price. If a competitive
industry, however, obeys the law of increasing returns or
diminishing cost, which as we have learned is true only of
periods of transition, the tendency of the producer will be to
add more of the tax to the price than in the case of constant
returns. For any increase of price due to the tax will tend
to decrease consumption. If he produces less, however, each
unit will, under the assumption that he has been producing
under conditions of increasing returns, cost the producer,
exclusive of the tax, more than before. But if he remains
a marginal producer, the price must finally find its level at
this point of higher cost to the marginal producer. In other
words, the price will tend to rise to a point higher than in the
case of constant returns. Of course, if he does not continue
to compete, but is crowded out by the abler producer, who
can more easily capture the market under conditions of in-
creasing returns, this result does not necessarily follow. It
may happen, for instance, that the more favored producer
will take advantage of the tax to drive the old marginal
producer out by adding only a small part of the tax to the
price, hoping to recoup himself by an ultimate monopoly ;
and then, when he secures a monopoly, he may put the price
up again. But granting a continuance of the competitive
conditions, with the old marginal producer still supplying 'his
share of the output, the addition to the price, as long as the
competition lasts, will tend to be greater than in the case of
constant returns. It must continually be borne in mind that
under the regime of competition price always equals marginal
,cost ; whatever increases this marginal cost increases price.
The action of the law of increasing returns tends to aug-
ment the marginal cost for the smaller output which results
from the imposition of a tax; therefore it tends to increase
the price. }

J If the competitive industry, on the other hand, obeys, as is
usually the case, the law of diminishing returns or increasing
cost where each increment in the amount produced costs

208 Shifting and Incidence of Taxation

more than the last the producer will be likely to add less
of the tax to the price than in the case of constant or dimin-
ishing cost.J For although the increase of price consequent
upon the -imposition of any part of the tax will decrease
consumption, each unit of this smaller output will, on the
hypothesis that he has been producing under conditions of
diminishing returns, cost the producer less than before. Since
price is fixed, under competitive conditions, at any given
moment at the point of greatest cost, and since the cost to the
marginal producer who remains a competitor is reduced, the
price will now be a little lower than in the case of constant
returns, and still lower than in the case of increasing returns.
In all these cases whether of competition or of monopoly,
whether of constant, of increasing or of diminishing cost
the important point remains, as before, the elasticity of the
demand. But given a certain elasticity of demand, we see
that in the case of monopoly the tendency is that less of the
tax will be shifted to the consumer when the industry obeys
the law of diminishing cost or increasing returns, and that
more will be shifted when it obeys the law of increasing cost
or diminishing returns; but that in the case of competition
the facts are reversed, and that more of the tax will be shifted
to the consumer when the industry obeys the law of diminish-
ing cost or increasing returns, and that less will be shifted
when it obeys the law of increasing cost or diminishing
returns. 1

. * The argument' in the text may be illustrated by diagrams. Take first the case
of competition. In Fig. I, let DD' be the demand curve. Let OX be the
amount of product; let OF be the line of price; let OL be the marginal cost be-
fore the tax, corresponding to the supply curve S J S; let ZCbe the amount of tax
added to the price under the law of constant returns, so that the price after the im-
position of the tax is OC, corresponding to the new position of the supply curve
T T'. If OM is the amount produced at the original price OL, giving gross .
receipts of OLSM, the amount produced after the price has been raised to OC
will be OM', giving gross receipts of OCT'M'.

If the industry obeys the law of diminishing cost, as in Fig. 2, the line S" S will
be curved downward. Before the tax is imposed, the quantity CM/ will, as before,
be sold at the price' OL or MS. But after the tax is imposed, equilibrium will be
attained when the new supply curve TT" intersects DD', which will in this case

General Principles

209

This is, on the whole, a comforting doctrine to the con-
sumer, because, as we have seen, the condition most favorable
to a monopoly is that of decreasing cost or increasing returns,

be somewhat to the left of the old point of intersection; so that now the quantity
OM" will be sold at the price M" T" or OE, which is higher than OC. "-

O -

M' M. v

FIG. i.
Constant Returns.

M" M .

FIG. 2.

Increasing Returns
or Diminishing Cost.

FIG. 3.

Diminishing Returns
or Increasing Cost.

If the industry obeys the law of increasing cost, as in Fig. 3, the line S'"S will
be curved upward. Now, after the imposition of the tax, the price will be fixed at
the point T"' t so that the quantity OM'" will be sold at the price M"' T f ", or
OB, which is lower than OC.

The extent to which in any case the new price, after the imposition of the
tax, exceeds the old price OL depends primarily upon the elasticity of the demand,
that is, the sharpness of the curve DD' ; but starting out from this increase of
price under the law of constant cost, diminishing cost adds more to the price,
increasing cost adds less to the price.

Under conditions of monopoly, however, price is fixed not at marginal cost, but
at the point of maximum monopoly returns. **fhis depends upon the margin
between cost and price.

^<A'

\T" D

7'

N'i

j

N

:> M' M.

FIG. i.
Constant Returns.

In Fig. i, where we have the law of constant cost, let everything be as before,
except that OS is the cost per unit; the line SS' the line of constant cost. Given
the demand curve DD', the monopolist will find the point of maximum net re-
p

2io Shifting and Incidence of Taxation

and the condition most favorable to competition is that of
increasing cost or diminishing returns ; and in each of these
cases the tendency is, as we now know, that less of the tax

turns at a price OA, with an output OM. His monopoly profits will be repre-
sented by AA'NS. If a tax ST is now imposed, the monopolist will find it to his
advantage to raise the price to C, with an output OM', his greatest net profits now
being CC' V T, a larger parallelogram than any other that can be constructed on
the new cost line TT'.

In Fig. 2 we have the law of increasing returns or diminishing cost. Since
cost diminishes with output, the curve S"N is a descending one. We assume, as
before, that, given the demand curve DD 1 , the monopolist will find his maximum
net returns at price OA, with an output OM. This assumes that after the point N
has been reached, the cost will not diminish farther, for there is always some limit
to the law of increasing returns. At this point the monopoly profits are repre-
sented by AA'NS. If the same tax as before is imposed, the monopolist will now
find it to his advantage to raise the price only to B, with an output OM". For
his greatest net profits will now be BB' V" R, a larger parallelogram than any
other that can be constructed on a base intersecting the new (curved) cost line

M"M

FIG. 2.
Increasing Returns or Diminishing Cost.

O M'"" M

FIG. 3.
Diminishing Returns or Increasing Cost.

In Fig. 3 we have the law of diminishing returns or increasing cost. Since
cost increases with output, the curve S'"N is an ascending one. We assume, as
before, that the monopolist will find his maximum net returns at price OA, with an
output OM, and with monopoly profits represented by AA'NS. If the same tax
as before is imposed, the monopolist will now find it to his advantage to raise the
price to E, with an output OM'". For his greatest net profits will now be
EE'V" R', a larger parallelogram than any other that can be constructed on the
base intersecting the new (curved) cost line T"' V.

The above reasoning can also be illustrated arithmetically. Let 0$ represent
a cost of i, and ST a tax of one hundred per cent or also I. Let OM represent

General Principles 211

will be shifted to the consumer than under any other pro-
portions in the ratio of product to cost.

Combining the conclusions reached under divisions 6 and

an output of four units, OM' of three and one-half, OM" of three, OM" 1 of two
and one-half. Let the distance from A to B, B to C, and C to E, be one-fourth.
Let OA be a price 3, so that OB is 3^, OC is 3^, and OE is 3|. SA will then be
2, SB 2\, SC 2|, SE 2f. Under the law of constant cost, before a tax is imposed,
monopoly profits will then be :

At price E 2.75 X 2.50 = 6.875

At price C 2.50 X 3 = 7.50

At price B 2.25 X 3.5 = 7.875

At price A 2 X4 =8

that is, the monopolist will prefer price A.

If a tax of S T or I is imposed, monopoly profits will be :

At price E 1.75 X 2.50 = 4.375

At price C 1.50 X 3 = 4.50

At price B 1.25 X 3.50 = 4.375

At price A I X4 =4

that is, the monopolist will prefer the price C.

If the industry obeys the law of diminishing cost or increasing returns, the sur-
plus of price over cost will no longer be as before 2, 2^, 2|, and 2f , but, let us say,
2, 2.20, 2.35, and 2.40; that is, with every unit of smaller output, the cost will be
progressively greater, and the surplus of price over cost will be progressively less*
Thus, before the tax is imposed, monopoly profits will be :

At price E 2.40 X 2.50 = 6

At price C 2.35 X 3 = 7.05

At price B 2.20 X 3.50 = 7.70

At price A 2 X4 =8

that is, the monopolist will, as before, prefer price A.

After the imposition of the tax, monopoly profits will be :

At price E fc 1.40 X 2.50 = 3.50

At price C 1.35 x 3 = 4.05

At price B 1.20 x 3.50 = 4.20

At price A I X4 =4

that is, the monopolist will now prefer price B, which is lower than price C.

Finally, if the industry obeys the law of increasing cost or diminishing returns,
with every unit of smaller output the cost will be progressively less, and the surplus
of price over cost will be progressively greater; instead of the surplus being as
before 2, 2^, 2|, and 2f, it will be, let us say, 2, 2.27, 2.55, and 2.90. Then,,
before the tax is imposed, monopoly profits will be :

212 Shifting and Incidence of Taxation

7 of this chapter, 1 it is evident that elasticity of supply by
which we mean the responsiveness of the quantity produced
to fluctuations in price depends on a combination of two
factors : the degree to which differential advantages of pro-
duction exist, and the ratio of product to cost. The influence
of this ratio of product to cost is, as we have seen, different
in the case of monopoly from its influence under conditions
of competition. In both cases, however, the greater the
chance that the imposition of a tax will cause a diminution of
supply, the less favorable will be the situation of the con-
sumer ; the smaller the prospect of a decrease in the supply,
the more favorable will be his position.

We may therefore sum up this part of the discussion that
has been carried on under divisions 5, 6 and 7, as follows :
The degree to which a tax on a particular commodity will be

At price E 2.90 x 2.50 = 7.25

At price C 2.55 x 3 = 7.65

At price B 2.27 x 3.50 = 7.945

At price A 2 X4 =8

that is, the monopolist will, as before, prefer price A.

After the imposition of the tax, monopoly profits will be :

At price E 1.90 x 2.50 = 4.75

At price C 1.55 X 3 = 4.65

At price B 1.27 X 3.50 = 4.445

At price A I X4 =4

that is, the monopolist will now prefer price E, which is higher than price C.

In the first edition of this work (pp. 151, 152) the reasoning was applied only
to cases of competition. Professor Marshall, likewise, in his interesting discussion
{Principles of Economics, book v, chap, xii, 4, p. 524 of 3d ed.) deals only with
cases of competition. In the following chapter, where he treats of monopolies,
he does not specifically discuss the action of the law of increasing and diminish-
ing cost. On the other hand, Professor Edgeworth fails to make the distinction
between the cases of monopoly and of competition. In the case of competition,
he agrees with the view here presented (cf. Economic Journal, vii, pp. 69, 70) ;
but he thinks that the result is the same in the case of monopoly (ibid., pp.
236, 237, and p. 406, note 4). Professor Edgeworth's demonstration, like the
statement of Cournot, rests upon an assumed mathematical proof, the accuracy of
which must be left to those versed in the higher mathematics.

1 See above, pp. 192 and 199.

General Principles 213

shifted to the consumer will vary inversely as the elasticity
/)f the demand and directly as the elasticity of the supply.
The elasticity of demand depends upon the extent to which
the commodities in question are removed not only from the
category of complementary goods, but also from that of
absolute necessaries or of high-priced luxuries, j The elas-
ticity of supply depends upon the extent to which differential
advantages affect the production, as well as upon the ratio of
product to cost. This ratio of product to cost, again, influ-
ences the shifting of the tax in opposite ways in cases of
monopoly and of competition respectively. It may be laid
down as a general law that when the demand is more elastic
than the supply, the consumer will bear a smaller part of
the tax than when the supply is more elastic than the
demand. Whether a tax will be shifted in its entirety, in
part, or not at all, depends on the article itself, on the degree
to which other articles may be substituted for it, on the size
of the margin of profit, and on the degree to which monopoly
enters into the nature of the industry on the product of
which the tax is laid. For the working out of this law in
practice, the reader is referred to the succeeding chapters
of the present work. The effect of a bounty will naturally
be the reverse of a tax.

These statements, so far as we disregard the limiting or
opposing forces referred to in division I to 4 above, 1 con-
tain the general law of shifting. We need still to discuss,
however, a few considerations, limiting the general law,
which are often of considerable practical influence in actual
life.

8. Is the Tax imposed on Margin or on Surplus?

When we say that the price of a commodity under the law
of competition is fixed by the cost of production, we refer to
the cost of producing the most expensive portion of the
actual supply. [This must not, however, be misunderstood.
As was already stated, the tendency of prices is to gravitate

1 See pp. 181, 186 and 187.

214 Shifting and Incidence of Taxation

toward the cost of producing the least expensive, not the
most expensive, part of the supply. Through the processes
both of concentration and of natural selection, the least
efficient producers are continually being crowded out, and
the price of the product is continually being reduced up to
that point, at all events, were there is no possibility of further
economies. But while the tendency is thus in the direction
of lowest cost, the temporary equilibrium between demand
and supply at any given moment adjusts itself at the point
of highest cost. In any given season, when a commodity
is sold, there is under competitive conditions a producer who
just gets back his cost, because his cost is equal to the price
at which the whole supply is sold. In this sense he is the
marginal producer, his product is the marginal product, and
the price of the whole supply is fixed at the point of the cost
of the marginal product.

It is clear, now, that if a tax is imposed it will increase the
cost of this marginal product, and provided that the mar-
ginal producer continues to produce and to remain the
marginal producer, the price of the whole supply will be
raised by the amount of the tax. To the extent that the
marginal producer is crowded out, a smaller proportion of
the tax will be added to price.

It may happen, however, that the tax does not hit the
marginal product at all. This may be due to two causes.
In the first place, the tax may be imposed on product, but
it may reach only other portions of the supply than the
marginal portion. In the case of interstate or international
competition, for example, one state may tax that part of the
supply produced within its borders, while the price may be
fixed in the international market, where the most expensive
increment of the supply comes from a country which imposes
no tax. The tax assessed in the first state will thus not
reach the marginal product, and will produce no effect on
the price. Not until the tax is so high that the increased
cost of this portion will relegate it to the position of the mar-
ginal product can the tax influence the price.

General Principles 215

Secondly, a tax may not reach the marginal product, be-
cause it is not imposed on production at all. It may be
imposed, not on production, but on the results of production.
In order that any change may take place in price, there must
be, as we have seen, some alteration in the supply, A tax
on the marginal product would obviously at once tend to
cause such an alteration in the supply. But if the tax is
imposed on what accrues to the producer after all his ex-
penses are deducted and his accounts closed, the tendency to
an alteration in the supply will be diminished. The surplus
above all expenses is either rent or profits. Economic rent
and pure profits are the results of price, not conditions of
price. A tax on surplus, therefore, would not reach the
marginal product at all, and would not tend to cause any
change of price. It is only through the slower and more
indirect influence of a general fall in profits that any alter-
ation, if at all, would take place. The greater the extent,
therefore, to which the tax falls on surplus, instead of on
margin, the smaller the chance of any shifting of the tax.

9. Is the Tax Large or Small?

From the point of view of pure theory it might seem
immaterial what the rate of tax is; for however slight the
charge might be, it would still be mathematically measurable.
But in practical life individuals often observe the same prin-
ciple that is expressed in the legal maxim de minimis non
curat lex. \K producer who is called upon to pay a very
small tax which would, under ordinary conditions, be shifted
to the consumer, may prefer to assume it himself rather than
to run the risk of annoying his customer about what is after
all a trifle.y Or the price of the commodity may be fixed by
custom, so that the producer will not dare to risk loss by any
addition to the price. A good example of the first case is
the small tax imposed by the United States in 1898 on parlor-
car tickets. Rather than annoy the passengers, the compa-
nies have assumed the tax. An equally good example of the

216 Shifting and Incidence of Taxation

second case is the small additional tax imposed by the United
States at the same time on certain brands of cigars and
tobacco, which continued to sell at the same price after the
imposition of the tax. As a former five-cent cigar or five-
cent package of tobacco could not have been sold at five and
a half or six cents, the only way in which the producer could
escape the tax was through a deterioration of the article.
How far competition would permit him to do this is uncer-
tain. In all such cases the unit on which the tax is imposed
is of importance.

On the other hand, it is equally true that a very small tax
may, in certain cases, make little difference to the consumer.
The elasticity of the demand may not be appreciably affected.
Under such conditions a producer who would otherwise be
tempted to bear the tax for fear of losing the trade will have
no scruples in adding the tax to the price.

10. Is the Tax Proportional or Graduated?

The considerations hitherto advanced as to the normal con-
sequences of the imposition of a tax depend on the hypothe-
sis that the tax is proportional. Since a graduated tax is the
rare exception rather than the rule in practical life, those
conclusions are in general valid. But we occasionally find
with increasing frequency in modern democracies that
(the rate of a given tax is graduated, instead of being pro-
portional. In almost all such cases the rate is graduated
upward, so that the tax is progressive ; in very rare instances
the rate decreases with the amount assessed, so that the tax
is regressive. 1 !

Where such a tax is assessed on surplus instead of on
margin, our conclusions respecting the shifting of a tax
require little, if any, modification. Whether inheritances,
for instance, are taxed proportionally or progressively can-
not alter the fact of the non-transference of the tax. But

1 For a fuller discussion of these terms, see Seligman, Progressive Taxation in
Theory and Practice. New York, 1894, pp. 8-12.

General Principles 217

when a tax is imposed on the marginal product for instance,
on gross product or on gross receipts it is obvious that a
progressive rate may completely alter the normal conditions of
profitableness. Under ordinary conditions, a proportional tax
which reaches the marginal product tends to increase the
price, as we have seen, by increasing the cost of this mar-
ginal product. But a progressive tax may be so arranged
that it will increase the expenses of the more favorably situ-
ated producer far more than those of the one who has
hitherto been the marginal producer. It depends upon the
extent of the progression whether the former marginal pro-
ducer now becomes the favored producer or not. It may
easily happen that a progressive tax on product in general
will not reach the margin at all. Where a proportional tax
would exert a decided influence on cost, a progressive tax
may exert, therefore, a far smaller influence. If a progres-
sive tax be levied on the buyer instead of on the seller, the
result may be just the reverse. In other words, the inci-
dence of a graduated tax is often less predictable than the
incidence of a proportional tax. In the remainder of this
work, unless the contrary is definitely asserted, (we \ shall
always use the word "tax" in the sense of a proportional tax.\

ii. Is the Commodity taxed a Final Good or merely an Inter-
mediate Good?

The entire discussion thus far has proceeded on the as-
sumption that the commodity subject to the tax is disposed
of by the owner, without considering whether the owner is
the original producer or not. Without the phenomena of
exchange, however, the conditions which affect the demand
or supply cannot be present. Moreover, (if the commodity
subject to the tax has reached its final owner, to be consumed
by him f no matter how protracted the period of consump-
tion i there is no opportunity for setting in motion the forces
that affect price. 1 f Once the tax has been shifted to the con-
sumer, it will remain there. On the other hand, if the com-

218 Shifting and Incidence of Taxation

modity is consumed productively, instead of unproductively,
the user is no longer the ultimate consumer ; the commodity
in question is only an intermediate good, not a final good;
and the whole case is reopened.

In studying the consequences, therefore, of any particular
tax in its practical operation, we must bear in mind not only
the normal theory, but the limiting conditions. In order the
better to prepare ourselves for the study of their application,
let us sum up these principles. 1

1. The more durable the thing taxed, the larger will be
the series of annual payments demanded by the tax, and the
more disastrous will be the weight of future payments when
shifted back upon the initial proprietor by future owners.

2. If the object is monopolized, the price is not fixed by
any marginal product ; hence the tax will not be shifted so
easily as in the case of the increased cost of a marginal
product.

3. The more general or the less exclusive the tax, the nar-
rower the taxless field to which the producers concerned can
migrate ; hence the greater the incentive to bear the burden
themselves.

4. If the capital is fixed, or if there is any obstacle to
perfect mobility, the shifting will be slighter and tardier than
otherwise.

5. If the demand is persistent, the producers will roll the
tax upon the consumers through a rise in price. But if the
demand is sensitive, the producers will bear more of the tax,
7 or else some will migrate.

6. If different parts of the supply of a commodity are pro-

1 It sometimes happens that a review of an author's book puts the points made
by him in a new light. So Professor Ross, in his account of the first edition of
this work, brought together the various principles laid down therein but scattered
through the different chapters. In so doing, he has greatly clarified the whole
exposition. See his essay, " Seligman's Shifting and Incidence of Taxation," in
the Annals of the American Academy of Political and Social Science, iii (1893),
pp. 444-463. The statement in the text differs, however, in some important
points from that of Professor Ross.

General Principles 219

duced at greatl)P*?varying costs, the less efficient producers
will be ruined by a tax which the abler producers can readily
pay.

7. If the commodity is supplied at decreasing cost, the
tendency is that where we have competition the consumer
will be likely to suffer more than in the case of an industry
.subject to the law of constant or increasing cost; but that
where we have monopoly, he will be likely to suffer less.
Since the law of decreasing cost is more favorable to
monopoly, it follows that a monopolist is less likely to shift a
tax than is a producer under competitive conditions.

8. To the extent that a tax reaches the surplus rather than
the margin, shifting will be less likely to result, since the
marginal product is the price-fixer.

9. The smaller the tax, the less will be the disarrangement
in the equilibrium of supply and demand, and the slighter
will be the normal action that will produce or prevent
shifting.

10. If the tax is graduated instead of proportional, the
tendency toward shifting will be accentuated or weakened
according to the rate of the progression or regression.

n. If the object is a final good, a tax once shifted to the
consumer will stay there. But if it be a commodity used in
further production, the whole case is reopened, and all the
other conditions may come in to determine whether or not
the tax shall be shifted to the second, the third or the final
consumer.

CHAPTER II
TAXES ON AGRICULTURAL LAND

THE assertion is frequently made that the American farmers
are taxed out of all proportion to their ability to pay. This
is due chiefly to the fact that they have to assume to a large
extent the burdens of other taxpayers. Outside of the rural
districts the great mass of personal property consists of in-
tangible personalty, which, as a rule, escapes taxation almost
completely. In the rural districts, on the other hand, the
great mass of personalty consists of visible tangible property
used by the agricultural communities. The country land-
owner, who is generally assessed also on his visible person-
alty, must thus pay, over and above his just proportion of the
public dues, an additional share which ought to have been
assumed by the owners 'of intangible personalty. What is a
real property tax in the rest of the state becomes a general
property tax for the farmer. 1

The force of this contention is denied in the commonly
accepted doctrine that the tax on the farmer's property is
diffused throughout the community. The farmer, it is said,
will add the tax to the prices of the products of his farm, and
will in this manner recoup himself for his original outlay.
The tax will thus be shifted, so runs the argument, from the
producer to the consumer ; since every one is a consumer,
the tax will virtually fall on the community at large, and is
hence a just and equal tax.

This argument is not a strong one, although, strange to
say, its chief weakness has not hitherto been pointed out.

1 Cf. the article on " The General Property Tax," in Seligman, Essays in Taxa-
tion, pp. 27-33.

220

Taxes on Agricultural Land 221

Even granting for the moment that the tax will be shifted
in its entirety, by being added to the prices of agricultural
products, it would fall on individuals only so far as they were
consumers of these products, In other words, if this were
the only tax, it would be a tax on consumption that is,
on expense. 1 Now, of all bases of taxation expenditure is
undoubtedly the least equitable. What a man spends is no
criterion of what he is able to contribute to the burdens of
the state. It bears no fixed proportion to taxable capacity.
Whatever other tests we may have of individual faculty
whether property, product or income not one of these has
any definite relation to expenditure. If one man has triple
the property or income of another, but, whether through
thrift or miserliness, spends only the same amount, it surely
cannot be said that the taxable capacity of the latter is equal
to that of the former, especially if the latter spends up to
a very narrow margin of his revenue, as frequently occurs.
In the one case there is available for future exigencies a
reserve fund which is entirely lacking in the other, that
completely alters its owner's obligations to the community.
Moreover, it is a well-known fact that differences in expendi-
tures are rarely so great as differences in property or income.
A tax on consumption alone would, therefore, fall with in-
creasingly crushing force on all those classes whose expenses
swallow up almost their respective income, or perhaps even
encroach on their capital. It is not, of course, here intended
to argue against the advisability of taxes on consumption as
a part, and, because of certain other advantages, even a
desirable and necessary part, of a tax system. The above
contention is directed against expenditure as the theoretical
basis of all taxation. A tax on real estate alone is, accord-
ing to this doctrine of incidence, a tax on expenditure. It
reaches only the poorer classes of society, and exempts in
ever increasing proportion the earnings or the property of

1 This was seen in the seventeenth century by Sir William Petty, who said :
" A land tax resolves itself into an irregular excise upon consumption, that those
bear it most who least complain." See above, p. 15.

222 Shifting and Incidence of Taxation

the wealthy. So far as the farmers themselves belong to the
poorer classes they would bear a disproportionate share of the
burdens. Thus the single tax on real estate, if it were diffused
throughout the community, would be most unjust and oppres-
sive. In reality, however, there is no such general shifting :
the tax on the rural landowner often tends to stay where it
is put.

The question of the incidence of the land tax presents
comparatively few difficulties. Since the time of Ricardo it
has been treated frequently and, on the whole, with success.
But it is remarkable that the writer who has discussed the
subject with the greatest clearness and subtlety from the
abstract point of view; the Spanish economist, Florez-
Estrada should have remained practically unknown to this
day. 1 Nevertheless, both Florez-Estrada's and Ricardo's
doctrines require some qualification in order to fit them to
the actual conditions of every-day life.

Theoretically, there may be five different kinds of land
taxes :

1. A tax on economic rent.

2. A uniform tax according to the quantity or the quality
of the land.

3. A tax on gross produce.

4. A tax on agricultural profits.

5. A tax on property or the. selling value of the land. 2

I. A Tax on Economic Rent

If land is taxed according to its pure rent, virtually all
writers since Ricardo agree that the tax will fall wholly on

1 Curso di Economia Politico,. For Don Alvaro Florez-Estrada. London,
1828, 2 vols. The quotations are from the sixth edition, published in Madrid,
1848. An excellent French translation was made by L. Galibert, under the title
Cours Eclectique d'Economie Politique ecrit en Espagnol, and published in three
volumes in Paris, 1833. Pantaleoni is the only writer who has referred to Florez-
Estrada. But he makes little effort to qualify any of the conclusions.

2 Florez-Estrada makes a slightly different division. Ibid., part iv, " Del Con-
sumo de la Riqueza," cap. v, ' De la Contribucion sobre la propriedad territorial/
ii, p. 328; in the French translation, Hi, p. 223.

Taxes on Agricultural Land 223

the landowner, and that it cannot be shifted to any other
class, whether tenant-farmer or consumer. Since land on
the margin of cultivation pays no rent in the economic sense,
and since the no-rent land fixes the price of all produce, a
tax on rent cannot affect the price of agricultural produce,
and therefore cannot be shifted. The point is so universally
accepted as to require no further discussion. 1

The further question as to how far the tax on rent may be
regarded as a burden on the owner, has been discussed above
in treating of the phenomenon of capitalization. It will be
remembered that when the rate of the tax exceeds that of
other taxes, the difference is not borne by the new purchaser,
but is shifted back to the original owner. A permanent tax
on rent is thus not shifted to the consumer, nor does it rest
on the landowner who has bought since the tax was imposed.

A tax on pure rent, however, is very rare. The more
difficult questions arise when the tax is assessed so as to
include not only the rent of the landowner but the profits
of the tenant farmer, or, as the case would be in America,
where landowner and farmer are one, where the tax is
assessed according to the value of the property. For the
market price of land is equal to the capitalized value of its
economic rent plus the profits of agricultural capital.

Ricardo maintained that if a land tax is assessed on all land
indiscriminately, or if it is proportioned to the quality of the
land, it will always be a tax on produce, and will consequently
raise prices to the consumer. This doctrine has generally
been adopted by his successors. In reality, however, the
matter is not so simple.

Let us consider the cases in turn, taking up next

1 Ricardo, Principles of Political Economy and Taxation, chap. 10. We do
not here enter upon the purely theoretical discussion as to the incidence of a tax
not on rent in general, but on some particular kinds of rent. Abstractly, it would
be possible to tax land suitable for raising a special kind of crop, and to exempt
it as soon as it were used for some other kind of crop. Such a tax on rent would
be akin to a tax on the profits of some particular occupation, as opposed to a tax
on profits in general, and would tend to be shifted to the consumer. But such
a tax on rent is hardly more than a theoretical possibility.

224 Shifting and Incidence of Taxation

2. A Uniform Tax according to the Quantity or the Quality

of the Land

In this case there are four possible results, namely : (i) not
only the tax but a sum over and above the tax may be shifted
to the consumer; (2) the exact amount of the tax may be
shifted to the consumer; (3) the tax may be divided between
the producer and the consumer ; (4) the tax may fall entirely
on the landowner. 1

The first case would be that of a fixed tax of so much per
acre without distinction of value, as was true in some of the
American commonwealths in the eighteenth century, espe-
cially Vermont and North and South Carolina. Suppose
that there are three tracts of land producing wheat of the
same quality, but, as a result of differences in fertility, yield-
ing respectively ten, twenty and thirty bushels to the acre ;
and suppose further that this quality* of wheat is worth 50
cents a bushel. Tract A would thus yield $5.00 an acre,
tract B $10.00 and tract C $15.00. If a tax of 50 cents an
acre is imposed on all the land, the owner of tract A will
have to obtain for his produce $5.50 or cease cultivating.
But if the price of ten bushels is $5.50, the price of the
twenty bushels produced on tract B will have to be $11.00,
and that of the thirty bushels on tract C $16.50, since the
price of the bushel will always be fixed by the expenses of
cultivation on tract A that is, 55 cents. The owner of
tract B will thus pay in taxes 50 cents more than before,
but, assuming that the demand is constant, will obtain from
the public $1.00 more than before, that is, he will make the
consumer pay to him something more than the amount of
the tax. Again, the owner of tract C will pay in taxes 50
cents more than before, but will obtain from the public $1.50
more than before. A uniform tax on quantity, therefore,
inevitably takes out of the pockets of the consumers more
than it puts into the hands of the tax collector. 2

1 Cf. Florez- Estrada, op. cit.; French translation, iii, pp. 221 et seq.

2 Ricardo called attention to this in chapter xii of his Principles.

Taxes on Agricultural Land 225

The second case occurs when the tax is not laid uniformly
according to the quantity of land, but is graded at various
rates per acre according to the quality of the land as, for
instance, in Kentucky and Connecticut during colonial times.
Thus, if in the above case the tax per acre on grade A were
50 cents, on grade B $1.00 and on grade C $1.50, then not
only would the price of wheat remain as before at 55 cents
per bushel, but the amount of taxes paid by the landowners
would exactly equal the increased price obtained from the
consumers. Hence, whenever a land tax is graded so as to
follow with precision the differential advantages of produc-
tion, and where the land is cultivated intensively up to the
point when the law of diminishing returns becomes effective,
given a constant demand, the tax will be. shifted entirely to
the consumers, without causing them any additional loss. In
practice, of course, such gradation of the tax has always been
very rough, so that it is very unlikely that the exact amount
of the tax will be shifted to the consumers.

The third case that of a division of the tax between the
producer and the consumer arises when the graded acreage
tax is imposed in such a manner that the progression of the
tax exceeds the augmentation in price. If, for example,
grade A were assessed at 50 cents, grade B at $1.25 and j
grade C at $2 per acre, the consumers would still have to pay
more than before the imposition of the tax, but the owners of
grades B and C would make less profits than before. The
jdegree in which the landowner and the consumer would share
the tax would depend, other things being equal, on the rate
of the graduation or progression of the tax.

Finally, the fourth case that of the tax resting entirely
on the landowner would occur on the supposition (which
manifestly is purely hypothetical) that the lands of inferior
quality were free of tax. For since such lands fix the price
of wheat, the owners of better lands could not raise the price ;
and since the tax is imposed on acreage, the tax would simply
represent a diminution of their revenue.

So much for the fixed tax per acre of land according to
Q

226 Shifting and Incidence of Taxation

quantity or quality a tax that is to-day virtually unknown
in advanced communities.

3. A Tax on Gross Produce

The most familiar example of a land tax on gross produce
is the tithe. The incidence of a land tax on gross produce
has been most clearly discussed by John Stuart Mill, 1 who at
first followed Ricardo in holding that a tithe, because it is
imposed on land of all qualities, reduces corn rents in equal
proportions ; but that in the same proportion as corn rent is
reduced in quantity, the corn composing it is raised in value.
The producer at the margin of cultivation, then, pays one-
tenth of his produce in kind, but since all prices are fixed by
his produce, his nine-tenths will sell for as much as the
whole ten-tenths previously sold for. At first, therefore, a
tithe would be shifted to the consumers.

As Senior has shown, however, this would be only the
immediate, not the ultimate, effect. 2 The final result would
be not an increase of price, but a diminution of production
and therefore a deduction from rent. It would ultimately be
a burden, not to the consumers, but to the producers ; for the
higher price of food and of raw material would tend to check
the progress of the community, and to lower to that extent
the demand for land. This point has been demonstrated so
clearly by both Senior and Mill that it is not necessary to
repeat their arguments, so familiar to all English-reading
students. Moreover, von Th linen has pointed out that the
question whether a land tax is shifted to the consumers
depends largely upon the character of the population as con-
sumers. In poor countries a land tax would not be shifted
even in first instance to the consumers, because they could
not afford to pay more. Such a tax would, then, simply lead

1 This is true, however, only of the later editions, where Mill accepted the cor-
rections of Senior. Cf. his Principles of Political Economy, book v, chap, iv,

3, 4-

2 Political Economy. By Nassau W. Senior. 6th ed., 1872, pp. 122-125.

Taxes on Agricultural Land 227

to a lowering of the standard of life of the consumers, and to
a decrease in the prosperity of the producers. 1

Finally, the validity of the doctrine that the tithe, even in
its immediate result, is shifted to the consumer depends on
the assumption that the tax is a universal tax, applicable to
all the land. This is not necessarily true. To-day, for ex-
ample, in England, owing to the process of commutation of
tithe, only part of the land is still tithable, so that, as in
the case of all partial taxes, the burden is borne by the
producer and not by the consumer. Even if all the land
were tithable, the presence of international competition, as
will be shown later, would render the tithe virtually a partial
tax and thus not susceptible of being shifted to the consumer.
Wherever the tax on gross produce still exists in civilized
countries, it can no longer be regarded as one that is neces-
sarily shifted to the consumer.

4, 5. A Tax assessed according to Net Profits p , or the Selling
Value of the Property ,

These two bases of the tax are, as has already been indi-
cated, equivalent ; for the selling price of agricultural land is
nothing but the capitalized value of the net profits ordinarily
derived from its use. Theoretically there may be two cases :
either the land tax is a part of a wider system which taxes
also all other net profits or all other capital or property ; or
the land tax is a single, exclusive tax, while other profits or
other classes of property are exempt.

In the case of a general tax on profits, or that of a general
property tax, it is difficult to see how the land tax can be
shifted to the consumer. The theory of its complete shifting
to the consumer assumes that the landholder at the margin
of cultivation will otherwise abandon his farm, after the
imposition of the tax, and transfer his capital and labor to
some other occupation. But to this argument it may be

1 Der isolirte Staat. Von Johann Heinrich von Thiinen. Erster Theil (2d
ed., 1875), PP- 326-339.

228 Shifting and Incidence of Taxation

objected that, if all other profits or property are equally
taxed, he will gain nothing by such a transfer. In fact,
under a general tax there will be no inducement for him to
abandon his farm. Since the supply will thus not be dimin-
ished, prices will consequently not rise. If, therefore, a tax
on landed profits or landed property were simply a part of a
general income tax or of a general property tax, there would
be no shifting of the tax. It would tend to stay where it
was placed in first instance.

It may be asserted, however, that our property tax is
general only in name, since personal property, as has been
indicated above, is virtually exempt from taxation outside
of the rural districts. It may further be said that Ricardo
and the other English authors discussed this form of the tax
on the assumption that it was an exclusive tax. Nevertheless,
it may be affirmed that, even on the assumption that the tax
on agricultural profits or real estate is an exclusive tax, it
does not necessarily follow that this will be shifted to the
consumer.

Ricardo' s theory would hold good only on two conditions :
first, that there was absolute mobility of capital and labor ;
and second, that the community in question was so isolated
that the farmers could fix the price of their own produce.
In actual life, however, these conditions are far from being
really existent.

The classical theory rests on the assumption that the owner
of the worst land in cultivation will abandon the land rather
than cultivate it at a loss ; and that the decrease of supply
will raise prices to the consumer. It is, however, incontro-
vertible that an increase of price often leads to a decrease of
consumption, which again reacts upon the price, so that at
best only a portion of the tax may be shifted to the con-
sumer. This point has been fully explained in the chapter
on general principles. Furthermore, it is in actual life fre-
quently a difficult matter for producers to decrease the supply
of agricultural products. To those acquainted with the con-
ditions under which the cotton crop is grown in the Southern

Taxes on Agricultural Land 229

States of the American Union, this is a familiar matter.
Although annual conventions of the cotton growers repeat-
edly resolve that the low price of cotton is due to over-pro-
duction, and that the supply should be curtailed, it seems
practically impossible to reduce the cotton acreage. In order
that any appreciable influence might be felt in the price, it
would be necessary for whole tracts of the lands at the margin
of cultivation to be abandoned, or to be used for some other
purpose. Now this practically means wholesale ruin for
immense classes, who have perhaps invested large sums in
improving the land, which they consider fit for only that par-
ticular purpose. Rather than abandon the land they will
often prefer to continue cultivation at less than the usual
profits, for the no-rent land is that on which the cultivator
gets just sufficient profits above the cost to enable him to
live. In other words, the tax would often merely degrade
the cultivators. Only when the tax is so exorbitantly high
as to swallow up the whole rent, and all the agricultural
profits, so as to leave the cultivator an inadequate margin for
living expenses, will he abandon the land in such large quan-
tities as to effect a material decrease of the supply. But such
a tax is unusual in civilized communities. In other words, a
tax on the landowner, if it be not extortionate, will simply
reduce his profits. In proportion as the theory of the abso-
lute mobility of capital from agriculture to commerce, or from
one kind of agricultural investment to another, is attended
with practical difficulties, the process of shifting the tax to
the consumer will be impeded.

Secondly and more important, the Ricardian theory as-
sumes a completely isolated community. In actual life, how-
ever, the market value of agricultural produce is fixed by the
conditions of production in widely separated localities or
countries. The imposition of a tax on the landowner of any
one particular locality, therefore, cannot change the price of
the product. The older theory seems to have overlooked the
facts of international relations. If taxes precisely identical
in character and amount were imposed by all countries on all

230 Shifting and Incidence of Taxation

farmers, then indeed, given the complete mobility of capital
just discussed, the tax might be shifted to the consumer.
But this is never the case. The Western farmer, the price
of whose wheat is fixed in Liverpool by the conditions of pro-
duction in countries thousands of miles distant, will not get a
whit more for his products if his taxes are doubled. He, and
he alone, must bear the burden of the tax. 1

In fact, if the older theory were absolutely true, it would
be virtually impossible to make the landowners or farmers
suffer by any land tax, provided it were not levied expressly
on pure economic rent. A country might then raise its entire
revenue by imposing taxes on land alone, and would in no
wise injure the agricultural interests. Yet all history has
proved the error of this view. From the day of the exac-
tions of the Oriental monarchs and of the later imperial
Roman tax system to the mediaeval methods of Spain and
the arbitrary land tax of pre-revolutionary France, much of
the misery of the agricultural classes must undoubtedly be
attributed to the revenue system which burdened primarily
the farmer. Implicit reliance on the Ricardian doctrine
might justify every exaction on the farmer, but would in-
evitably react on agricultural prosperity. 2

Our conclusion, hence, is that under actual conditions in
America to-day the landowner may virtually be declared to
pay in last instance the taxes that are imposed on his land.
At all events, it is erroneous to assume any general shifting
to the consumer. To the extent that our land tax is a part of
a general property tax, it cannot possibly be shifted ; to the
extent that it is more or less an exclusive tax, it is even then
apt to remain where it is first imposed namely, on the
landowner.

In England, where the farmer is almost universally the
tenant and not the landowner, and where the rural tax or

1 Cf. above, the discussion of general principles, p. 214.

2 Cf. De la Monnaie, du Credit, et de I'Impbt. Par Gustave du Puynode, ii,
P- '53-

Taxes on Agricultural Land 231

rate, as it is called, is levied according to rental value and
imposed on the occupier, the question is primarily as to the
incidence of the tax between the landowner and the tenant.
It may be said that the tax will fall on the landowner in the
case of pure competitive rents, and will be divided between the
parties in the case of non-competitive rents. At any given
time, when the tenant makes out his lease, he makes allow-
ance for the rates which are collected from him. The rent
which he is willing to give will vary with the tax which he is
compelled to pay. To this extent, the burden falls wholly on
the landowner. On the other hand, if, after the lease has
been made out, a change is made in the rates, either by law
or by the working of local causes, this increase necessarily
falls on the tenant farmer who advances the tax. Still, this
is not of much consequence in the long run, because the tenant
will insist on an allowance for the increase when a new lease
is taken. On the whole, therefore, it may be said that the
tax on agricultural land falls on the landowner, whether the
owner be the occupying farmer as in America, or whether
owner and farmer are distinct personages as in England.

This is true, however, only on the assumption that the
rent is a true competitive rent. Thus, it has frequently hap-
pened in England that farmers have been charged a lower
rent than the purely competitive or rack rent. In such
cases, an increase in the local rates would fall on the tenant
and not on the landlord. As Mr. Goschen puts it, "any
increase in local burdens must fall on the margin between
the actual rent and the rack rent, and so far dimmish the
advantage derived by the farmer from his actual rent being
below f a rack rent ; until that margin were exhausted, it
would naturally be useless for him to apply to his landlord
to readjust his rent." 1 In the same way a remission of rates
will inure to the advantage of the tenant.

On the other hand the recent depression of English agri-

1 See the analysis in Goschen : " Draft Report to the Select Committee on
Local Taxation of 1870," in his Reports and Speeches on Local Taxation, 1871,
esp. pp, 165, 1 66.

232 Shifting and Incidence of Taxation

culture has caused a change in the opposite direction. The
remarkable fall in prices during the past twenty years has
not only destroyed the margin between actual rents and
-economic or rack rents, but has, in many cases, created a
margin on the other side. Although the farmer has been
struggling to adjust his rent to lower prices, the process has
been a slow one ; and the fall in actual rents has not kept
pace with the fall of economic rent due to these lower prices. 1
Under such conditions, a remission of rates would be of all
the greater advantage to the tenant. In the case of non-
competitive rents, then, the incidence of the tax is partly on
the owner and partly on the tenant.

1 Local Taxation and Finance. By G. H. Blunden. London, 1895, P- 4 2>

CHAPTER III
TAXES ON URBAN REAL ESTATE

IN the case of city real estate it is necessary to make a dis-
tinction between the two components of the real estate tax,
the ground tax and the building or house tax the tax on
the site and the tax on the structure ; for they are governed
by distinct principles. Strictly speaking, we should have
drawn the same distinction in the case of the agricultural
landowner. But in that case the distinction is unimportant,
because in America at all events the tenant is, in almost
all cases, the owner, and because the value of the farmer's
buildings is generally of minor importance when compared
with the value of his land. So far as this is not true, how-
ever, the principles now to be discussed apply there also.

In American cities, where the occupiers of houses are fre-
quently not the owners, the real estate tax is levied on the
owners of property ; and the question of ultimate incidence
concerns only the landlord and the tenant. In England,
where local rates are levied with very few exceptions on
the occupiers, 1 not the owners, and are proportional not to

1 The local rates in England are, theoretically, assessed on the occupier. Even
for a long period before the Elizabethan poor law (43 Eliz., chap, ii), which is
the basis of all English local taxation, it was the occupier, and not the owner, on
whom fell the duty of relieving the poor. Cf. in general the history of local
assessments in Castle, On Rating, chap. I, and a volume published by the Poor
Law Commissioners in 1 846 entitled The Local Taxes of the United Kingdom.
However, under the Small Tenements Act of 1869 (32 and 33 Viet., chap. 41,
3, 4) wherever the ratable value does not exceed 20 in London, .13 in
Liverpool, IQ in Manchester or Birmingham or ^8 elsewhere, the owner may"
compound for the rate and may be assessed instead of the occupier. Further-
more, by the act of 1850 (13 and 14 Viet., chap. 99), whenever the tenancy is for
less than three months, the occupier may deduct the rate from the rent. Under

233

234 Shifting and Incidence of Taxation

capital value but to rental value, the question is more com-
plicated because of the peculiar divisions of ownership.
Thus, not only is the occupier almost universally distinct
from the owner of the building, but the owner of the build-
ing generally does not own the land. Furthermore, the
building owner usually does not pay a ground rent to the
original landowner, but pays only a leasehold ground rent,
which changes from time to time, to the intermediary who
has leased the land on a long rental and at a fixed ground
rent from the original owner. In such a case the question
of the incidence of rates concerns several parties, the land-
owner, the leaseholder, the building owner and the occupier. 1
Such conditions, although rare, are not absolutely unknown
even in American cities. Our study of the shiftings, if true
at all, must be applicable equally to the simple American
and the complex English conditions.

The urban real estate tax is either a pure land tax for
example, when laid on vacant lots or a tax on both the land
and the buildings. The latter is called in America the real
estate tax, and on the continent the house tax ; but both of

these two acts it has now become the practice for a part of the tenement house
population, and even for the inmates of flats and apartments, to have the rates
paid by the landlords. Nevertheless, in default of actual statistics, it may be said
that in the English towns local taxes are paid in first instance generally by the
occupiers.

1 There are four chief methods according to which houses are built in the Eng-
lish cities: (i) the freehold purchase system, where the builder simply buys the
lot outright; (2) the freehold rent-charge system (called in Scotland the feu-sys-
tem and in Manchester the chief-rent system), where the landowner sells the land
to the builder and has no reversionary interest, but reserves a perpetual fixed
yearly payment called the rent-charge or chief; (3) the long-building-lease sys-
tem, where the builder takes a lease for 999 years, at a fixed annual rent; (4) the
short-building-lease system (or London leasehold system), where the landowner
leases the land to the builder, or what is known as an " improved leasehold
ground rent." See Urban Rating, being an Inquiry into the Incidence of Local
Taxation in Towns. By Charles H. Sargant. London, 1890, chap. I. See also
Evidence and Report of the Select Committee on Town Holdings, 1886-1890; and
Munro, The Local Taxation of Chief Rents, 1891. Cf. Local Taxation and
Finance. By G. H. Blunden. London, 1895. See also The History of Local
Rates in England. By Edwin Cannan. London, 1896.

Taxes on Urban Real Estate 235

these designations are, from the point of view of economics,
incorrect. The continental term is wrong because the house
tax really includes a tax on the site as well as a tax on the
structure. The American term is inexact, because it con-
fuses such entirely distinct taxes as the ground tax and
the building tax, which are governed by different laws of
incidence.

The value of a house, in the ordinary usage of the word,
depends upon the value of the structure plus the value of
the lot. The value of the structure itself is fixed by the law
that governs the value of commodities the supply of which
can be increased at pleasure, that is, in the long run it is
equal to the cost of production, or rather of reproduction.
The rent of the house proper is normally equal to the inter-
est on the capital expended plus an annual sum which, when
capitalized, will be sufficient, after paying all necessary ex-
penses, to replace the capital by the time the house is worn
out. The laws which govern the incidence of taxes on
houses or on house rents are, therefore, analogous to those
which govern the incidence of taxes on capital or on com-
petitive profits. On the other hand, the value of the lot is
fixed in agreement with the general principles of economic
rent, according to which the price paid is measured by the
superiority of situation. 1 It would be still more exact to

1 Pantaleoni, Traslazione dei Tributi, pp. 208-213, makes a long argument
against confusing economic rent with the rent of a city lot. With him economic
rent means agricultural rent, and is due only to the law of diminishing returns;
while rent arising from situation is not economic rent, but is what he calls surplus
rent (soprarcddito) . But this surplus rent is simply another name for profits.
Rent proper, he maintains, arises from the fact that the price of agricultural prod-
ucts is the same while the cost of production differs. Surplus rent, or profits on
city lots, arises from the fact that prices differ, while the cost of production re-
mains the same. The English, he thinks, have improved upon the Germans and
French in distinguishing between land rent and ground rent; but have not seen
that ground rent is really not economic rent at all.

In answer to Pantaleoni, it may be said that there is a certain justice in his dis-
tinction, but precisely in the opposite way from that in which he understands it.
It seems arbitrary to confine economic rent to that differential product of the law
of diminishing returns. Ricardo himself saw this and von Thunen has developed

236 Shifting and Incidence of Taxation

make the assertion that the value of a city lot is determined
by the general law of price which governs all those com-
modities which are not susceptible of an indefinite increase
in their supply.

We may consider four cases, corresponding to actual
facts :

1. The tax may be levied on the ground owner alone,
without any reference to a house tax on the house owner.
This would correspond to Henry George's single tax. It
would be in effect a tax on ground rents.

2. The tax may be levied on the house owner, who may or
may not be the ground owner. This is the case, for instance,
with the " Hauszinssteuer " in Austria.

3. The tax may be levied on the ground owner, who is at
the same time the house owner. This is the condition of the
real estate tax in the United States.

4. The tax may be levied on the occupier. This is true of
the local rates and the inhabited house duty in England.

It is with this fourth case alone that the English econo-
mists have busied themselves. On the other hand, most of
the French and German works discuss only the second case.
Let us take them up in order.

I. A Tax on the Ground Owner

The case of a tax levied only on the ground owner is
comparatively simple. The owner who leases his land will
always endeavor to get as much as possible for it. The
price he gets will, in general, be entirely unaffected by the
imposition of a tax. For, since the supply cannot be in-
creased, and since there is no question of cost of production,

the idea. On the other hand, whatever truth there is in what Sidgwick calls the
static theory of rent applies equally to the causes which fix the rent of a building
lot. In other words, instead of applying the principle of economic rent to city
lots, it would be more exact to say that the same causes which fix the differences
in value of city lots also fix those of agricultural lands, that is differences in rela-
tive situation or in relative fertility combined with differences in situation or, in
short, differential advantages in yielding net profits.

Taxes on Urban Real Estate 237

the change in price will be effected only through a change in
the demand. The price, in other words, will be fixed by the
degree of marginal utility. Now, if the demand for the site
increases to such an extent that the ground rent not only
covers the new tax but leaves a profit in addition, the tax
cannot be shifted to the lessee. For the price would have
been the same without the tax, since the demand of the
lessees is not affected by a tax on the lessor. The ground
owner will simply get less net return than he would have
obtained had no tax been imposed that is, the tax will fall
on him. In the same way, if the demand for the site
decreases, the price will diminish and the ground owner can
certainly not shift the tax. Moreover, if he sells the land in
the meantime, he will lose again in the diminished selling
value of the lot. Finally, if the demand remains the same,
there will be no alteration of the price, and the ground
owner will obtain less net income than before because of the
tax. Therefore it may be laid down as a general rule that a
tax laid on the owner of the soil, or on ground rents, cannot
be shifted. 1

When the tax on the ground rents, however, is assessed
not on the ground owner but on the occupier, the results, as
we shall see later, are somewhat different.

1 J. S. Mill, Political Economy, book v, chap, iii, 6, argues that this is true
only if we assume an equivalent tax on agricultural rent. He says : " If a tax were
laid on ground rents without being also laid on agricultural rents, it would, unless
of trifling amount, reduce the return from the lowest ground rents below the ordi-
nary return from land, and would check further building . . . until increased
demand or diminution of supply . . . had raised the rent by a full equivalent
for the tax. But whatever raises the lowest ground rents raises all others, since
each exceeds the lowest by the market value of its peculiar advantages."

This argument seems to err through the assumption of a slow and continuous
gradation from agricultural rents to ground rents. As a matter of fact, there is
almost always a sudden jump from the one to the other. One has only to look at
the outskirts of the ordinary American town to be convinced of the fact that land
even only prospectively fit for building sites will be kept idle sooner than be used
for agricultural purposes. The whole question, moreover, has simply a theoreti-
cal interest, since agricultural lands are almost always taxed as well as city lots.
Sidgwick, The Principles of Political Economy, book iii, chap, viii, 8, iv, fol-
lows Mill.

238 Shifting and Incidence of Taxation

2. A Tax on the Hotise Owner

Let us next take up the case where the tax is imposed on
the house owner, irrespective of the question whether he
is the landowner. In other words, let us deal with the tax on
the structure, or, if the tax is not levied according to capital
value, with the tax on building rent as opposed to that on
ground rent.

The generally accepted doctrine that of Adam Smith,
Ricardo and Mill may be expressed as follows : Buildings
represent the investment of so much capital and labor.
They require an outlay for construction, for maintenance,
for repairs, for insurance. No one will enter on the business
of having houses built for investment unless, he can count on
a definite return, which must in general be equal to the
returns from capital invested in undertakings of approxi-
mately the same nature. A tax imposed on the owners of
the building will therefore generally be shifted to the occu-
piers; for, if the tax could not be shifted, it would reduce
the profits of the owners below the customary level in similar
investments. The result would be a cessation of building
operations, a consequent scarcity of houses and a gradual
increase in the rent or value of existing houses, until the
margin became high enough to tempt the investor into
further operations. The working of this law of the trans-
ferability of capital is, of course, slower here than in the case
of quickly consumable commodities ; for since houses are
more or less permanent, we cannot assume an immediate
diminution of supply. Given a stationary supply of houses,
their value or their rent will rise only with the slow increase
of population, that is, with a relative diminution of the sup-
ply. But in the long run the working of the law is inevita-
ble. Such a tax will, therefore, be shifted to the consumer,
that is, to the tenant.

This doctrine, which may be called the orthodox opinion,
requires qualification in some particulars. The two chief

Taxes on Urban Real Estate 239

reasons why the theory of the inevitable shifting of the house
tax to the tenant is not always true are as follows : (i) a dis-
tinction should be drawn between new and old houses ; and
(2) another should be drawn between general and exclusive
taxes.

In the first place, a distinction should be drawn between
houses already constructed before the tax is imposed or
increased and those built after the imposition or increase of
the tax. It may be argued that, since a tax on new houses
is always shifted to the occupier for otherwise they would
not be built the same reason applies to old houses ; for
a scarcity of houses will affect the values and rents of all
houses, whether new or old.

This argument, however, is not convincing. Suppose that
a town, or a portion of a town, is for some reason decaying.
In such a case, the values and the rents of existing houses
will of course fall. The owners of existing houses cannot,
at first, escape bearing the burden of the tax. They cannot
shift the tax to the ground owners, for since the structures
are already on the land, presumably under long leases,
the ground owners cannot be compelled by competition to
reduce their ground rents. Until the expiration of the lease
the house owner certainly cannot shift the tax to the ground
owner. On the other hand, the house owner will not be able
to shift the tax on the occupier, because no actual diminution
in the supply of houses is possible, and because, by the sup-
position, there is no increase in the demand, but rather the
reverse. Not until a condition of stable equilibrium has been
reached will the building owner cease to bear the burden.
That is to say, it will not be a question of equality of profits,
but simply one of the existing relations of demand and supply.
Hence, if population is stationary or declining, a tax on exist-
ing houses (and there will, of course, be no new houses,
because there will be no demand for them) will inevitably
fall on the house owner. Furthermore, if he sells the house
he will lose the capitalized value of the decrease of rent ; so
that, under the theory of capitalization, only the original

240 Shifting and Incidence of Taxation

owner will bear the tax until there is a still further decline in
population, when the process will repeat itself.

Although the condition just described may be considered
in some sense exceptional, it actually occurs in all communi-
ties at periodically recurring intervals. And although the
reasoning would not be applicable to the general conditions
of progressive society where new houses are being continually
built, the distinction is of sufficient importance to invalidate
the hard and fast rule of the older economists.

Another objection, which is, however, less tenable, has
recently been raised against the older doctrine. Pantaleoni
in Italy and Sidney Webb in England maintain that a
tax on the building owner tends to be shifted, not on the ten-
ant, but on the ground owner. Pantaleoni claims that this
must necessarily happen because, if the tax were to fall on
the house owners, they would build no more houses, and
would thus effect a decrease in the demand for building
lots, which would result in a depreciation of the value of the
land. 1

This argument seems to rest on a misconception. It is,
indeed, true that the building owners will not bear the tax.
But what reason is there for assuming that the mere cessa-
tion of building operations, which would ensue on the impo-
sition of the tax, will cause a depreciation in the value of the
lot? The non-construction of new houses cannot, of itself,
cause the ground rents of existing houses to fall ; it can only
prevent a further increase in the value of the land, or per-
haps, at most, bring about a fall in the value of vacant lots.
Until the old leases run out, the ground rents of occupied
lots are not apt to fall, even if population, and therefore
demand, diminishes. Much less will they fall if simply a
tax is imposed. Even after the old leases run out, the ground
rents will not fall unless the taxes on the houses are so
extraordinarily high that the building owners, who have the
privilege of renewal, will prefer to abandon their houses
entirely rather than to renew their leases. Only in this most

1 Pantaleoni, op. cit., pp. 221-223.

Taxes on Urban Real Estate 241

exceptional case 1 can the building tax be shifted in part on
the ground owner. If, indeed, the law of real estate were
changed so that fixtures to the land would not go with the
land, and if houses could easily be removed from plot to plot,
then, but only then, would it be true that a building tax
could always be transferred to the ground owner in the shape
of decreased ground rent.

Mr. Webb's argument is equally inconclusive. He main-
tains that the ground landlord does not occupy a fixed posi-
tion. Land in the neighborhood of a city has only an
agricultural value until it becomes ready for splitting up into
building plots. But the value of such land, says Mr. Webb,
does not pass imperceptibly from agricultural value to the
building value. By custom there is always a great jump.
The landowner, who can in any case get a price much larger
than the agricultural value, Mr. Webb continues, has a fixed
point of resistance. He will be willing to take a little less
than before the imposition of the tax, since it is merely a
question of competition between the builder and the owner
of land available for building. Hence the incidence of a tax
on houses will be the same as that of a tax on land namely,
on the landowner. 2

This argument seems to be fallacious because it ignores
the fact that the ground owner is in the stronger position.
As between the landowner and the tenant, the tenant is the
weaker party. 3 The house builder knows in normal cases of
increasing demand that he can more easily raise rents (since
demand increases) than compel the ground owner to take

1 This exceptional case is virtually the one mentioned by Professor Edgeworth
in his example 7 in the Economic Journal, vii, p. 645. He expresses it a little
differently, making the exception consist in the fact that the tax is equal to the
original ground rent plus the constant building rent.

2 Webb, in Report from the Select Committee on Town Holdings, etc., 1890,
qu. 42-44, PP- 5 6.

8 Bastable, Public finance, book iv, chap, ii, 5, as well as Edgeworth,
Economic Journal, vii, pp. 66-68, seems to overlook this in expressing the opinion
that the tendency is for the tax to be shifted to the ground owner. Graziani,
Istituzioni, p. 362, agrees with the argument in the text as over against Panta-
leoni and Webb.
R

242 Shifting and Incidence of Taxation

less than the market value. The landowner is not compelled
to part with his land ; but the tenant is compelled to occupy
some apartments. 1

It would, therefore, in the main be true that, given the
normal conditions of progressive society and the continued
existence of prosperity and apart from the qualification
to be noticed below the tax on the building owner is
shifted. And since, as we have just seen, the tax cannot be
shifted to the ground owner (except in the rare case men-
tioned), 2 it will tend to be shifted to the other party interested
the occupier. In other words, given an increased demand
for house accommodations, the rents of existing houses
will rise until the supply of new structures is equal to the
demand.

It may be said that in the meantime the house owners
have a practical monopoly. Theoretically, indeed, the house
owner himself would during the interval bear the tax if the
rise of rents were due solely to increase of population, be-
cause in the face of this increased demand he could have
obtained the same rent, had the tax not been imposed. In
other words, as in the case of all monopolies where the price
is fixed only by the purchasing power of the consumer, the
tax would simply mean a diminution of the otherwise greatly
enhanced profits to the house owner. 3 Practically, however,
there is never such an interval in progressive communities.
Houses are built continually, and if there is temporarily any
deficiency in the supply, it is owing to the decreased profits

1 For a fuller proof of the validity of this statement, see below, p. 253.

2 Professor Bastable advances another case : " It may happen that the prem-
ises, owing to the situation, command a monopoly value, in which case the owner,
having obtained the highest possible rent, must submit to pay the public charges;
the mere building owner will recoup himself at the ground landlord's expense."
Public Finance, book iv, chap, ii, 5. But why should the landowner take less?
The building owner is in the weaker position, for his building is on the land, and
under the law goes with the land. Moreover, as is pointed out below, p. 251,
there is no such thing as a strict monopoly value of a lot.

3 This is the case mentioned by Ricardo, Principles, chap, xiv, par. 2 ; by John
Stuart Mill, Political Economy, book v, chap, iii, 6, par. 3 ; and by Professor
Edgeworth, Economic Journal, vii, pp. 50-52.

Taxes on Urban Real Estate 243

of the house owners. In order that these profits may be
maintained, the tax on new houses must fall where alone
there is a margin for it that is, on the rent paid by the
occupier. But since the rents in the new houses fix the
standard of rents in the old houses (allowance being made
for the superiority of situation, which, however, has nothing
to do with the building rent, but only with the ground
rent), the owners of both old and new houses are able,
in the normal cases here cited and in the long run, to
shift the burden to the tenants. But it must be remembered
that this is true only in the normal cases and in the long
run.

The second qualification of the doctrine that the building
tax will be shifted to the occupier rests on the distinction
between a general and an exclusive tax. The whole argument
up to this point has been conducted on the assumption that
the house tax is a special or exclusive tax. As soon as other
forms of capital or other profits of investments also are
taxed, the entire basis of this argument falls away. This
has been frequently overlooked by those who have attempted
to draw practical conclusions from the theories of the class-
ical economists. The doctrine of the shifting of a house tax
to the occupier depends on the assumption that would-be
house builders will otherwise prefer to put their money in
non-taxable investments, thus bringing about a scarcity of
houses and an increase of rents. But if other capital or
profits are also taxed, there will be no reason for refusing to
invest in houses. Hence rents and values will not rise, and
the tax cannot be shifted. In other words, when a house
tax is part of a system of taxation which reaches all other
kinds of property or income, and taxes them at the same
rate, the incidence of the tax will always be on the original
taxpayer that is, the house owner. His profits, like those
of all other capitalists, will be reduced by the tax. So,
again, if house property or house rents are taxed at a higher
rate than the property or profits of other classes, only the
surplus above the average rate of the tax will be shifted

244 Shifting and Incidence of Taxation

to the occupier, and that only in the normal cases already
mentioned. 1

Our conclusions may be summarized as follows : If a tax is
imposed on the building owner, it will remain on him when
population decreases or is stationary, or when the locality
decays. It will be shifted to the ground owner only when
the diminution or decay is so great and the taxes so high that
the building owner will voluntarily relinquish the house rather
than renew the lease. It will be shifted to the consumer
that is, the occupier under normal conditions of advance
in economic welfare so far as the tax is an exclusive tax.
Otherwise only so much will be transferred to the occupier as
exceeds the usual tax rate for other property or profits, while
the remainder will fall upon the house owner. The exact
proportions depend upon the general system of taxation in
each particular country or epoch, and upon the particular
conditions of the individual case.

3. A Tax on the Owner of House and Ground

We next come to the third case, where the tax is levied on
the ground owner who is at the same time the house owner.
This is the common American system of the real estate tax.
The question of incidence is here only between the owner and
the tenant. The problem is, therefore, comparatively simple,
as we need only to combine the conclusions arrived at in the
two preceding cases.

So far as the real property tax may be resolved into the site
tax and the building tax, the tax on the land when assessed
on the landowner will tend to remain, as we have seen, where
it is first put. The incidence of the ground tax, in other
words, is on the landlord. He has no means of shifting it;
for, if the tax were to be suddenly abolished, he would never-

1 The theory of capitalization of incidence is not applicable here, although,
remarkable to say, it has been attempted by Myrbach, "Die Besteuerung der
Gebaude und Wohnungen in Oesterreich," Tiibinger Zeitschrift fiir die gesammtc
StaatsTjuissenschaft, vol. 41, esp. p. 409.

Taxes on Urban Real Estate 245

theless be able to extort the same rent, since the ground rent
is fixed solely by the demand of the occupiers. The tax
simply diminishes his profits.

The incidence of the house tax, on the other hand, is fixed
by the rules laid down above. The question, therefore, as to
how far the real estate tax is shifted to the occupier in Amer-
ican cities depends partly on the actual existence or non-
existence of a general property tax, partly on the relative
value of the house and the lot, and partly on the peculiar
circumstances of the particular piece of property.

If our general property tax were actually enforced, the real
estate tax would beyond all doubt be borne entirely by the
owner. But in American cities the general property tax has
become virtually a real property tax. In other words, city
real estate bears the greater part of the weight of municipal
taxation. In proportion as city houses are taxed at a higher
rate than other capital, the main condition under which the
tax may be shifted to the occupier is present. If we take the
small American towns, where the investments are mainly
local and where personal property is reached to a fairly high
degree, then it is very probable that the real estate tax is not
shifted to the occupier. But the larger the city, and thel
greater the chances of investment outside, the less will be I
the proportion of personalty taxed, and the greater will be
the possibility of the shifting of a part of the real estate tax.

The possibility that the tax may be shifted turns into a
probability when we remember that the building tax tends to
form the greater part of the total tax. The average dwelling-
house in New York city, for example, is worth, when first
built, from two to three times as much as the lot. In the
tenement house districts the proportion is slightly, if at all,
less, except in the case of the tumble-down wooden houses,
which are fast disappearing. It is true, of course, that with
the passage of time the value of the house tends to decline,
while that of the lot tends to increase, from which it might
be inferred that the real estate tax falls mainly on the owners.
But this tendency is materially counteracted by the fact that,

246 Shifting and Incidence of Taxation

as sites become more valuable, owners are apt to tear down
the old structures and to erect more expensive, and therefore
more lucrative, buildings. Even in the crowded business
centres it is now becoming the custom to erect vast buildings
whose value considerably exceeds that of the ground on which
they stand.

Finally, remembering the qualifications laid down above, it
may be said that, while the real estate tax falls on the owner
in case of a stationary or a declining population, a consider-
able portion of the tax is shifted to the tenant, in normally
prosperous town or city districts, under the present adminis-
tration of our property tax. When we reflect that in the
city of New York over three-quarters of the population live
in tenement houses, we are thus forced to the conclusion that
in the great cities a great share of American local taxation is
to-day borne by those least able to pay. The greater the
extent, however, to which the existing real property tax is
being generalized or supplemented by other taxes designed
to reach the real ability of the taxpayer, the less probable
will be the original shifting of the tax to the occupier. The
reforms in the general conditions of American local and
state taxation will thus indirectly affect many classes who at
present think that they have nothing either to gain or to lose
by the process. The question as to how far these may again
be able to shift the tax on others is a part of the larger ques-
tion of the taxation of property, profits and wages, and will
be discussed later.

4. A Tax on the Occupier

We take up finally the question of the incidence of a tax
assessed upon the occupier according to the rent he pays.
This is the system of the English local "rate." Here again
we must distinguish between the ground rent and the build-
ing rent

Let us discuss first that portion of the tax which is theo-
retically levied on the land. In accordance with the general

Taxes on Urban Real Estate 247

principles laid down in our discussion of the tax on the
ground owner, it might seem that the tax on rent, although
advanced by the occupier, must in the long run be borne by
the ground owner. The tax will be shifted by the occupier
to the house owner, it is said, because, when the tenant takes
out his lease, he will make a deduction, measured by the
height of the tax, from his rent. He will offer only so much
rent as is warranted by the superiority of the site ; and this
superiority is not increased by the imposition of a tax. To
this extent, then, the tax will fall on the house owner. But
the building owner will shift the tax to the owner of the land.
As has been said: "The builder calculates on a certain profit,
or else he would not build ; he knows that tenants of a cer-
tain class can afford to give a certain rent and no more for a
certain kind of house; and therefore if building is to take
place at all, it is clear that the rates must fall there where
alone a margin exists to bear them; that is to say, on the
price given, or ground rent promised to the owner of the
soil." i

The contention, however, that this part of the tax falls
wholly or necessarily on the ground owner, although it has
been usually adopted, is partially incorrect; and for four
reasons. These are (i) the relation between rent and rates;
(2) the distinction between long and short leases; (3) the
relation between the ground landlord and the building owner ;
and (4) the degree of elasticity in the demand for the par-
ticular plot of land.

In the first place, the ground rent might be so low and the
rates so high that the builders could not afford to erect any
more houses. They could not hire the land for any less,
because the ground rents would be so low that the owner
would prefer to use the land for other purposes rather than
submit to a reduction. The result would be a diminution in

1 Goschen, " Draft Report," etc., op. cit., 166. The same idea is shared by most
of the English writers. The evidence given before the Select Committee on
Local Taxation in 1870 contains every possible view. Cf. esp. questions 1276,
2 739 3 2II > 344 and 4050.

248 Shifting and Incidence of Taxation

the supply of houses and a consequent rise of rent to the
tenant or consumer. But this first condition will arise very
rarely, and may be passed over as unimportant. 1

Secondly, the whole argument that this part of the tax
falls on the landowner rests on the assumption that at the
beginning of every lease the lessee will demand that allow-
ance be made for the tax. This assumption is, however, not
of much use in the case of long leases. After a long lease
has been taken out, an unexpected change may occur in the
rates ; in fact, the growing tendency of modern local taxa-
tion is toward an increase. The landowner who has fixed the
ground rent for a number of years will still get this rent,
irrespective of any growth of rates. The increased burden
cannot then be shifted on him; it must be borne by the
occupier who advances the tax. Not until the expiration of
the lease will the tenant be able to make a new arrangement
by which he will try to shift the burden on the owner. Thus,
only in the case of short tenancies could it happen that the
tax would fall on the owner. In all those cases especially
numerous in England where the occupier rents for a term
of years, the excess of any rates beyond the amount calcu-
lated in the original lease necessarily falls on the occupier.
The important point to be noticed is the time of the original
imposition of the tax a point too often neglected. If the
owner was assessed for the taxes in first instance, as in
America, there would be no question that this excess of
taxes, like the remainder of the ground rent tax, might fall
on him. But if the occupier advances the tax, he cannot
improve his condition until the expiration of the lease. In
England, then, the ground rent tax does not fall wholly on
the owner, but at any given time may be borne in part by
the occupier.

Before taking up the third and fourth limitations on the
theory that the ground rent tax is shifted to the ground
owner, let us consider the problem in its most usual form
the determination of the incidence of a ground rent tax

1 Mr. Goschen himself makes allowance for this.

Taxes on Urban Real Estate 249

assessed on the occupier in the ordinary case of short leases,
In the preceding paragraph it has been taken for granted
that at the beginning of each short lease the tenant will insist
on a reduction of the rent as a compensation for the local
rates assessed upon him. Only on this assumption will the
owner ultimately bear the taxes. But is this assumption
always correct. The real question is : Who bears the taxes
in the case of short leases or tenancies by the year, the quar-
ter, or as is the case with the majority of the tenement
house population the month or the week ?

The solution of this problem involves an application of
the considerations affecting the general law of value, as laid
down in the preceding chapter. From the point of view of
pure theory there are three possible cases. (A) where the
supply of building lots is far in excess of the demand, as in
the suburbs or in sections of dwindling prosperity, where
there are many unrented houses; (H) where the supply of
buildings on new lots just about keeps pace with the demand ;
and (C) where the supply of building lots is exhausted, and
the number of houses may be considered as constant. 1

Case A is not attended with much difficulty. If the lot is
situated in any outlying section, or in a decaying portion of a
town where the demand is slack, the tax, even if advanced
by the tenant, will be shifted to the landlord. The occupier
can afford to choose, and will not voluntarily assume the bur-
den of any one else. Being in the stronger position, he will
not consent to pay the higher rent due to the imposition of

1 A somewhat similar classification is given by Pierson, Leerboek der Staat-
huishoudkunde (2d ed., 1896), pp. 156, 157 and 174-185. Mr. Pierson distin-
guishes four cases: first, where there is an abundance of building lots, as in
the country, and where the ground rent accordingly amounts to little or nothing;
second, where the locality is decaying, and rents fall below the ordinary return on
the capital invested in the house, and where the ground rent is also zero; third,
where there is a rentless margin on the outskirts of the city with an interior area
within which ground rents form a considerable portion larger as we approach
the centre of the total house rent; fourth, where all the building lots are occu-
pied, and where the supply of houses may be considered constant.

This classification, it will be seen, has many points in common with the dis-
tinctions in the text. Mr. Pierson thinks that when a tax is imposed on houses,

250 Shifting and Incidence of Taxation

the tax. But this will hold good only so long as the decay
is continuous. As soon as the decay is arrested, we have the
conditions of case B, to be discussed in a moment.

Case C likewise presents little difficulty. Let us assume
the existence of a walled town where every plot is occupied,
or a section of the city which, through some combination
of circumstances, is the only one fitted for a certain kind of
business, and where all the land is covered with buildings.
In such a case, the landowner has a virtual monopoly, and
will exact the highest rent that the tenant can pay. If a
ground rent tax is, then, imposed on the tenant, it will be
shifted to the landowner, on the general theory of taxation
of monopoly profits ; for, according to the hypothesis, the
landowner has already exacted the uttermost farthing from
the tenant. Could the tenant pay an increased rent that
is, the old rent plus the new tax on ground rent the land-
lord would have exacted this before the imposition of the tax.
In the same way, a remission of an existing tax on the occu-
pier would enure to the landowner, through an increase of
the rent charged to the occupier. Thus, in the case of a
monopoly site, as well as in the reverse case of a site which
goes begging for a tenant, a tax on ground rent assessed on
the occupier will be shifted to the landowner.

This case C, however, is only of theoretic interest. Practi-
cally, it never exists. The mediaeval walled towns which were
increasing in population always reserved some vacant build-
ing space within the walls. As soon as this was exhausted,
the walls were enlarged or the surplus population was swept

the result will be that in the first case the ordinary law applicable to manufactured
commodities will obtain; and that in the second and fourth cases, no influence
on house rents will be perceptible. The third case, which he considers the most
difficult, he solves in the following way : at the margin supposing that the de-
mand for new houses increases with the growth of population rents will rise by
the amount of the increase in the cost of production, so as to affect the ordinary
profits of the builder. This increased rent at the outskirts will increase competi-
tion for houses of the interior, and will send rents up to a point such that the ex-
cess of rent paid by the occupier in the more favorably located areas over that
paid at the outskirts will be about the same as before, or perhaps a little less than
before.

Taxes on Urban Real Estate 251

beyond the walls. In modern times, again, there is no such
thing as a strict monopoly of building sites. The ground rent
of even the dearest plot in a crowded city exceeds the ground
rents of other plots only by the value of its relative superiority.
Monopoly implies absolute control of supply. Where build-
ing lots shade into each other by imperceptible gradations,
with an abundant supply of the lower-grade lots, we cannot
speak of an absolute control of the total supply, but only of
a control of a part of the supply. This is not monopoly, but
only the ownership of a better grade, possession of which
gives a higher price, but not a monopoly price.

Let us, then, take up case B, which is the ordinary case
in normal communities. It is the case of a district growing
in population and prosperity, where there is an ever-increas-
ing demand for building lots, but where the increase of
ground rent is limited by the possibility of utilizing unbuilt
land in less favored sections. Rents in the crowded slums,
or in a favored business section, will continually rise ; but at
any given moment the rise is limited to the differential ad-
vantages which a particular neighborhood possesses over
other possible sites. With the increase of population, there
is a continual increase of house accommodation in the wider
periphery. The possibility of getting an equally good apart-
ment a little further off will keep the rent of the better
situated apartment down to the level of the other, plus an
addition due to the advantages of the better situation. Rents
in the slums are, indeed, higher than rents in the suburbs ;
but the former exceed the latter chiefly because of the saving
in car-fare, and because of the assumed social benefits of
life in a crowded city. Any effort to put rents above this
margin of advantage would inevitably fail.

Here we meet the considerations which we have mentioned
as the third and fourth reasons 1 for dissenting from the
ordinarily accepted view as to the incidence of a tax on
ground rent. The third reason was the relation between the
house owner and the landlord. When a man rents a house

1 Above, p. 247.

UNIVERSIT

252 Shifting and Incidence of Taxation

and agrees to pay taxes in addition to the rent, he does not
make a formal distinction between the tax on building rent
and the tax on ground rent. He is simply conscious of the
fact that a house in a better neighborhood costs more than
an equally good house in a poorer neighborhood, and that
the local rates which he is called upon to pay are by so much
the larger. If an additional tax is imposed on what is theo-
retically the ground rent portion of his periodical payment, it
may indeed happen that the tenant will content himself with
meaner apartments in the same neighborhood, or will seek
equally good rooms in a less desirable locality. In such a
case, the decreased demand for the original house might
induce the house owner to be satisfied with a lower total rent,
and he in turn would endeavor to shift the loss, so far as it
is due to a tax on ground rent, to the owner of the land.
But is it true, as Adam Smith says, that "the more the
inhabitant was obliged to pay for the tax, the less he would
incline to pay for the ground" P 1 Is it not rather the case
that, as we have pointed out above, 2 a tax on the owner of
the building can be shifted to the owner of the land only in
the exceptional case of the tax being so high as to make the
house owner willing to abandon the house. Hence, even on
the assumption that the tax will bring about a change in the
demand for particular houses, the burden will not fall (except
in most unusual cases) on the landowner, but rather on the
building owner. Above all, the process here described does
not imply a shifting of the tax from the occupier to the
building owner (or, in exceptional cases, to the landowner).
Even though the occupier can evade the tax, he cannot shift
it. Evasion, as we know, is quite another thing from shifting.
The tax that the occupier pays on his smaller rent will still
fall on him. The landlord (or rather the " house-lord ") may
enjoy, for the time being, less revenue than before, but the
new tax levied on the tenant will nevertheless fall on the
tenant. A small tax on smaller rent is just as bad as a high
tax on high rent. Even under the most favorable Jiypothesis,

1 Wealth of Nations, book v, chap. 2. 2 Above, p. 240.

Taxes on Urban Real Estate 253

then, we cannot speak of a total shifting of the tax from
occupier to landlord.

This brings us finally to the fourth and most important
consideration the question, namely, of elasticity of demand.
Since the ground rent, as we have seen, must be paid as a
part of the total rent of the house, the problem is really one
of the demand for house accommodation. Most writers who
have spoken of houses have put them in the category of
ordinary commodities of complete elasticity, where a change
in price immediately brings about a proportionate change in
demand. But this hypothesis, upon which the validity of
the reasoning in the preceding paragraph depends, is of ques-
tionable accuracy. 1 In a preceding chapter it was pointed
out that in the case of absolute necessaries, as well as in that
of expensive luxuries, great alteration of price goes hand in
hand with slight variation of demand. 2 House accommoda-
tion, now, is in part an absolute necessary, in part an expen-
sive luxury. For many classes of the population, especially
in the congested areas, it is essential for the tenants to be
near their work. For one reason or another, they prefer to
remain where they are. As in the case of all necessaries, the
effect of a tax will be to cause them to forego other things
rather than change their residence. Practically, it means that
they will raise money to pay the increased rent by such expe-
dients as taking in lodgers that is, by foregoing some of
the comforts that they have hitherto enjoyed. In other quar-
ters of the city, on the other hand, comfortable houses may
be put in the category of luxuries. It is a familiar fact that
many people prefer to maintain their supposed station in life
at almost any cost. In such cases a tax on house accommo-
dation tends, as in the case of all taxes on luxuries, to make
them forego other things which they deem less desirable.

1 Professor Edgeworth {Economic Journal, vii, p. 52) still clings to this hypoth-
esis. He concedes the opposite in the case of the working classes ; but he fails
to notice that this is equally true of houses considered as luxuries rather than as
necessaries.

2 Above, p. 189.

254 Shifting and Incidence of Taxation

A tax, then, which will bring about such a displacement as
materially to affect the demand for house accommodation
must be an extraordinarily high one. Under usual conditions
the elasticity of demand would be apt to frustrate the action
of the assumed law of complete shifting. The argument is
similar to the one that has been used in discussing the effect
of economic friction. Just as we objected above to the
older theory of the shifting of the land tax to the con-
sumer, because of the untenable assumptions of perfect
mobility of capital and territorial isolation, so the same objec-
tion may be made to the theory of the necessary shifting of
the local rates from occupier to landlord, and largely because
of similar untenable assumptions. As has been well said,
economic rent is " the rent which an intelligent tenant who
had an alternative investment for his capital and mobility,
and acquainted with the market and his own industry, would
offer to pay." l But the rent actually paid often differs from
pure economic rent. John Stuart Mill has pointed out that
in Ireland agricultural rents are often persistently above the
economic rent, mainly because of the lack of opportunity and
the lack of mobility on the part of the tenant. In the same
way the tenants in the slums of large cities have practically
little mobility. They must live in the neighborhood of their
work, they shrink from the expense in moving from apart-
ment to apartment, and their choice is limited in a hundred
ways. Here, as in so many other cases, the tendency of the
tax is to stay where it is first imposed. 2

1 Sidney Webb in Select Committee on Town Holdings, 1890, Evidence, qu. 51.

2 As Sir T. H. Farrar says : " Whatever be the theory on these matters, a tax
is very apt to stick where it first falls." Select Committee, etc., Evidence, qu. 1246.
Cf. Thorold Rogers : " It is by no means the case that a person who has a tax im-
posed upon him can always impose the whole of that tax upon his neighbor."
Ibid., qu. 2721.

Some of the qualifications of the old doctrine are well put by Cliffe-Leslie in
the following passage : " The doctrine by which eminent economists of our own
day affect to determine the incidence of rates assumes . . . that capitalists not
only know the past and present profits of all occupations and investments, but
foreknow them at remote periods to the end of a long building lease, for exam-
ple. Yet it is clearly impossible for persons contemplating the building or buying

Taxes on Urban Real Estate 255

We see, then, that the incidence of a tax on ground rent
is not the same when the tax is advanced by the tenant as
when it is assessed on the ground owner. 1 In the latter case,
as in the United States, it is always borne by the ground
owner; in the former case, as in England, it is generally

of new houses to foretell, even for twenty years, the profits that a single investment
will yield. The movements of business and population, the demand for houses
and other buildings, the increase of wealth and money, and the general range of
incomes and prices, the supply of new houses on the spot, the means of locomo-
tion bringing other districts within reach, all defy calculation. . . . The truth is
that the profits of house property, the rents that can be exacted from occupiers, and
the incidence of rates, depend on no such fiction as the ' average rate of profit/
but on the demand for and the supply of houses, and these conditions vary from
time to time, and from place to place. . . . The constant increase of population,
the narrow limits of distance from their business within which it is convenient to
most people to live, and the cost and trouble to existing occupiers of removal,
give the owner, in most cases, the stronger position, and enable him to throw any
increase in the rates on the occupier. . . . The occupier of the house pays all
the rent that can be screwed out of him. A little more could be screwed out of
him were there no rates, and to that extent the rates may be said to fall on the
owner, the remainder being borne by the workmen." " The Incidence of Im-
perial and Local Taxation on the Working Classes," in Essays in Political and
Moral Philosophy. London, 1879, pp. 207-209. In the 2d ed. under the title
Essays in Political Economy, London, 1888, this passage may be found on pp.
399-401.

1 One of the most noteworthy of the recent writers to discuss the tax on the
occupier is Mr. G. H. Blunden, in an article on " The Incidence of Urban Rates,"
published in the Economic Review, vol. ii, Oct. 1891. Mr. Blunden's conclusions
agree in the main with those expressed in the text, with one exception. He seeks
to make a distinction between dwelling-houses, and shops or business premises,
thinking that rates on shops in the best situation fall on the ground landlord be-
cause he possesses a monopoly. But in the first place Mr. Blunden really makes
no such distinction, because he tells us (p. 496) that rates on ordinary dwelling-
houses in congested areas may also fall on the ground owner, while in less de-
sirable localities, rates, whether on dwelling-houses or on shops, do not fall on the
ground owner. Mr. Blunden's distinction is therefore really one between mo-
nopoly and competitive sites, not between shops and dwellings. But even this
distinction of Mr. Blunden is untenable, for the advantages of sites merge into
each other by imperceptible gradations. The relative differences in eligibility
between an alleged monopoly site and a less desirable site nominally subject to
competition are not altered in the least by the imposition or the remission of a
tax which affects both sites proportionally. In his book on Local Taxation and
Finance, London, 1895, Mr. Blunden seems to modify his distinction between
dwelling-houses and shops. See pp. 55, 56.

256 Shifting and Incidence of Taxation

borne to a considerable extent by the occupier; and only
in more or less unusual cases is it shifted by him to the
owner of the house or land. The exceptional conditions are to
be found in outlying or suburban districts, in decaying quar-
ters, and in cases of extraordinarily high taxes. What in the
older theory was considered the rule thus turns out rather
to be the exception.

Let us now leave the tax on ground rent and proceed to
discuss that part of the tax which is due to the structure,
that is, the tax on building rent. The argument here is
somewhat simpler.

We have seen that even if an exclusive tax is assessed on
the building owner, it will, in normal cases of increasing
demand, be shifted in great part to the occupier. A fortiori,
if the tax is levied on the occupier, it cannot be shifted to the
building owner ; for a tax paid by the tenant is to all intents
and purposes a special tax. There is no other taxable object
which can be put in the same category as rent paid by ten-
ants, unless it be the interest paid by debtors. But we have
yet to hear of any attempt to tax creditors by levying a tax
on interest paid by debtors. In other words, in order to
ascertain the actual burden we must add to the nominal rent
at all events that part of the tax which is theoretically levied
on the structure apart from the soil. In the long run the
occupier tends to bear the tax, except in those quarters or
under those conditions where the demand suffers a consider-
able check, or where we are confronted by an absence of
competitive conditions.

This holds good, of course, only on the assumption that
the rate of the tax is uniform on all the houses concerned.
To the extent that the rates vary in different parts of the
same town, the excess in any particular case tends to fall
ultimately on the owner, not on the occupier. This is simply
an instance of a more general law. If a prospective tenant,
on whom taxes are levied in first instance, has the choice of
two houses of equal desirability but in different parts of the
town, the amount of the tax being in one case ten dollars

Taxes on Urban Real Estate 257

more than in the other, he will certainly choose the latter
house or compel the owner of the former to forego ten dollars
of the rent. In England the districts within which the rate
of the tax is uniform are much smaller than in America. It
frequently happens that different parts of the same city, or
even opposite sides of the same street, pay different rates
because located in different parishes. In such cases it is fair
to make a distinction between the constant and the variable
or differential part of the building rate, the latter represent-
ing the excess above the rate that is uniform in all the dis-
tricts. Only the constant part of the building rate will fall
on the occupier ; the remainder will be borne by the building
owner, and in certain favorable cases will be shifted by him
to the landowner. This variable element of the building
tax, however, will in general be very insignificant in amount,
for the reason that, even in England, the normal differences
in the rates in city districts which usually have similar ex-
penses are apt to be exceedingly slight. 1 Even in such a
case, then, it may be said that the building tax will fall
almost entirely on the occupier. 2

1 The contention of Sargant, Urban Rating, 1890, p. 49, that the differential
rate amounts to two-thirds or even three-quarters of the total tax seems to involve
an error. He terms " constant " rate only that part of the tax which is uniform
throughout the kingdom. This is arbitrary. In speaking of a differential rate we
must always compare two houses of equal desirability or in the same neighbor-
hood; for it is manifestly impossible to say how much of the differential rate falls
on the structure, and how much on the plot. We must not compare a house in
London with a house in a country parish, because there is no competition be-
tween them. The rule holds good only within the narrow range of houses sub-
ject to the same competition.

2 Fawcett's discussion of this question is unsatisfactory. He makes a distinc-
tion between buildings in general and those possessing exceptional advantages of
situation. In the former case, rates, he says, are a charge on the occupier; in the
latter, on the ground owner. " For if rates were remitted, the saving resulting
would simply represent so much added to the ground rent, since rent is fixed by
the demand, and the demand would not be altered if rates were remitted." Faw-
cett's argument can be turned against him. It may equally well be said that,
given a certain demand before rates were imposed, the levy of new rates would
not change the rent because it would not change the demand. Hence the rates
would fall on the occupier who pays them, and not on the ground owner, whose

s

258 Shifting and Incidence of Taxation

To sum up, it may be said that, when the local real estate
tax is levied according to rental value and assessed in first
instance on the occupier, as is the case in England, the main
burden of the tax will rest ultimately on the occupier, not on
the owner of the premises. For the building tax, as we have
seen, will usually rest almost entirely on the occupier; and
the building tax forms in almost all cases the larger part of
the total tax. The tendency to erect costly structures on val-
uable sites is, indeed, not quite so strong in England as it is
in America, because of the division of ownership between the
landlord and the house owner ; but the tendency nevertheless
exists.

Not only does the building tax normally fall on the occu-
pier, but, as we have seen, the ground tax will generally be
borne to a very great extent by the occupier. If we add this
portion of the site tax to what is practically the whole of the
building tax, we see that by far the larger part of the total
local tax falls on the tenant. Even on the assumption that
the incidence of the tax on structure is hypothetically the
same as that of the tax on site, it still remains true that the
tax as a whole tends to rest in considerable part on the occu-
pier, for the reasons that have been advanced in considering
the site tax. 1 The determination of the exact proportions is
necessarily impossible. Here again, as in the case of the real
estate tax, it may be said that in a prosperous and progressive
community the tax tends to fall chiefly on the tenant, while
in decaying and unprosperous districts the tax tends to fall
on the owner ; but in all cases more of the tax will tend to be

rent is unchanged. In fact, Fawcett's whole distinction between these classes of
houses is untenable. Every house possesses " certain advantages or disadvantages
of situation." The advantages merge into each other by imperceptible grada-
tions. Cf, the chapter on " The Incidence of Local Taxation " in his Manual of
Political Economy, 6th ed., 1883, especially p. 618. On the other hand the
commonly accepted doctrine of Ricardo and Mill fails to make either of the dis-
tinctions that have been pointed out in the text, for it states that the ground tax
falls on the ground owner, and the house tax on the occupier, each of which
statements is partially incorrect, or, at all events, inexact.
1 Above, pp. 249-255.

Taxes on Urban Real Estate 259

borne by the tenant when the tax is originally imposed on
him than when the tax is assessed on the owner. 1

1 It is no wonder, then, that in England the movement for the tax on ground
values, assessed on the owner, should now be making such rapid headway. For
the English system, with its exemption of the landowner from special assess-
ments for local improvements, and with its casting so large a share of the whole
burden on the occupier, is assuredly open to criticism. In Scotland and Ireland
the rates are generally divided between occupier and owner. The same plan is
now also proposed in England.

CHAPTER IV

INCIDENCE OF TAXES ON PERSONAL PROPERTY, ON CAPITAL
AND INTEREST

WHAT is called personal property in English-speaking coun-
tries includes not only capital in the economic sense, but con-
sumable commodities not used in production, like books and
pictures, and wealth of other kinds, like money. Taxes may
be imposed either on property itself or on the revenue derived
from property. Since all taxes are nominally paid out of
revenue, it is thus immaterial, so far as the question of inci-
dence is concerned, whether we speak of taxes on capital or
of those on interest and profits. It has been laid down as a
general proposition by a recent writer that " the taxation of
property is the taxation of the property owner." 1 The mat-
ter, however, is by no means so simple as is assumed.

So far as a tax is laid on personal property which is not
capital it cannot be shifted. For instance, if a tax is imposed
on the permanent owner of luxuries, like pictures or jewels,
he, and he alone, bears the burden. Of this nature are what
are known in England as the assessed taxes and in the con-
tinental countries as sumptuary taxes. Whatever is held
simply for enjoyment and not for sale, provided it is not used
for productive or lucrative purposes, is not capital. A tax on
such property cannot be shifted, because the property is not
sold, and because it produces nothing which can be sold.
Here, indeed, the taxation of property is the taxation of the
property owner. On the other hand, the incidence of a tax

1 " The Single Tax." By Charles B. Spahr. In Political Science Quarterly,
vi, p. 633. Cf. the same author's An Essay on the Present Distribution of Wealth
in the United States. New York, n.d. (1896), p. 154, note.

260

Incidence of Taxes on Capital 261

on capital or on profits and interest is somewhat more com-
plicated. We may conveniently discuss the subject under
three heads :

A. A uniform tax on all capital or interest.

B. An unequal tax on all capital, or a uniform tax on only
some forms of capital or interest.

C. A tax on profits.

It is with this last division only that the English economists
have hitherto concerned themselves.

A. A Uniform Tax on all Capital

Let us frankly state, at the outset, that this is only a
hypothetical case. It is the theory of the American property
tax; but it is not the practice, and it can never be the prac-
tice. Why not ?

A tax on capital can be unequal in two ways. There may
be inequality in the rate, or there may be inequality in the
taxable capital. In other words, the tax may be assessed on
all capital, but in different proportions ; or it may be assessed
on only some forms of capital. Now a universal tax on all
capital is an impossibility in the modern world. It might be
possible in a completely isolated community, where all the
inhabitants employed their entire capital within the narrow
limits of the community ; but in actual life it does not exist.
Not only does the tax differ from commonwealth to com-
monwealth, but the field within which capital is employed
is as wide as the world ; while the efficacy of any tax law
is restricted to a particular state or locality. In other words,
the international employment of capital renders a tax on all
capital an impossibility. Only on the assumption that every
state in the whole world taxed all forms of capital alike could
we have such a universal tax. But this is most improbable.

Secondly, even granting that there was such a universal
tax, it would still be unequal within the limits of any particu-
lar state ; for, even if the state attempted to tax all forms of
capital at the same rate, it could never succeed. Not only

262 Shifting and Incidence of Taxation

would there always be some forms of capital within the state
which, as all experience has shown, would completely evade
taxation, but the same legal rate on various kinds of capital
would inevitably be a different actual rate. This is evident
when we consider the rate of interest. The rate of interest
varies with different kinds of capital, according to the security
of the investment, the length of the loan, the state of the
money market and a hundred other factors. In New York
state, for instance, during a single year the rate of interest
has varied from two and a half per cent on certain prime
bonds to a few hundred per cent on loanable capital in Wall
Street. A uniform rate of tax on capital would thus result in
very divergent actual rates on the interest or earnings of vari-
ous forms of capital. Hence, from whatever point of view
we regard it, a uniform tax on all capital is an impossibility. 1

Bearing in mind, then, that a uniform tax on capital is
only an hypothesis, let us endeavor to ascertain its incidence.
The question, of course, can affect only the capitalist and
the borrower. As between them, it is plain that a uniform
tax on all capital must fall on the lender, that is, on the
capitalist. There would be no way for him to shift the
burden. As it is not to be assumed that he would consume
his capital unproductively, he would attempt to reimburse
himself for the tax either by investing the capital in some
business or by lending it to some one else. If he invested it
in a business, the demand for loanable capital would decrease
as much as the supply, for he would simply be doing what
the borrower would otherwise have done. The rate of
interest would thus not rise. If he invested it in fixed
capital or land, the rate of interest would certainly not tend
to rise; for any large investment in fixed capital would simply
set free so much circulating capital, that is, the purchase
price of the fixed capital. Under either supposition, there-
fore, the tax could not be shifted.

There is one case, of course, in which the burden of the

1 Pantaleoni, Traslazione, p. 245, has called attention to this fact. His whole
discussion on this point is very noteworthy.

Incidence of Taxes on Capital 263

tax could be partially evaded. If the tax on capital were so
exorbitantly high as to diminish the return to the capital
below the rate of what John Stuart Mill calls the practical
minimum, further accumulations would be decidedly checked.
An attempt would be made by the employers of capital to
improve production to such an extent that the enhanced
profits would still give them the same net returns as before.
This is sometimes the result of taxes on capital ; they act as
a stimulus to improved methods of production. To the ex-
tent that this is not true, however, further accumulations of
capital would be discouraged. Even in such a case, however,
it does not follow that the tax would be shifted to the borrower.
The loss would be felt by the community at large in the
shape of a decline in general prosperity. It is impossible to
state in advance how much of the burden would be borne by
any particular class of the community. 1

B. An Unequal Tax on Capital

Let us now leave the realm of hypothesis and assumption,
and come to the facts of every-day life. The actual tax on
capital is, as we have seen, everywhere an unequal tax, how-
ever equal it may be nominally. The important question
thus is : What is the incidence of an unequal tax on capital ?
Let us discuss the incidence as between (i) the original
owner and the new purchaser ; (2) the present owner and the
borrower ; or (3) the producer and the consumer.

I. The Incidence of a Capital Tax as between Original
Owner and New Purchaser

This whole subject is governed by the law of the capitali-
zation of incidence, which has already been discussed. 2 We
need thus only repeat our former conclusion. When a new

1 John Stuart Mill, Political Economy, book v, chap. 3, 3, comes to prac-
tically this conclusion in discussing the tax on profits. Properly speaking, the
argument is applicable to the tax on capital or interest, as stated in the text.

2 Above, pp. 181-186.

264 Shifting and Incidence of Taxation

or suddenly increased partial tax is imposed on certain kinds
of capital, the tax, if it cannot be shifted to the consumer of
the article, or if it does not lead to a gradual cessation of the
production of the commodity, will be discounted in a depre-
ciation of the capital value of the article by a sum equal to
the capitalized value of the annual tax, and will therefore fall
on the original owner of the commodity before the tax was
imposed or increased, and not on the new purchaser. In
other words, when two classes of capital are taxed at unequal
rates, the excess of the tax above the average rate tends to
be borne by the original holder, because the new purchaser
pays so much less for capital on account of the tax. Other-
wise he will prefer to invest his money in something else
which will bring him the usual interest. It is only when the
tax is again increased that the present owner is compelled to
bear the new burden. The limitations of the doctrine must,
however, not be forgotten; 1 for it is just because of failure to
notice these limitations that some writers have fallen into the
error of assuming that a tax on capital is always a tax on the
capitalist. If a tax could not be shifted, or if it could not
destroy the producer, who has bought the business, then
indeed the excess of an unequal tax, or the exemption from a
tax, would be capitalized or amortized into a change in the
capital value of the capital taxed. But, as we shall soon see,
it is an error to assume that the tax can never be shifted, or,
on the other hand, that it can never injure the purchaser who
continues to produce.

2. The Incidence of a Capital Tax as between Debtor and
Creditor or Borrower and Lender

To just the same extent that it is difficult for a capitalist
to shift a tax which is imposed on all capital, it is easy for
him to shift to the borrower a tax which is imposed on only

1 For a fuller discussion of this doctrine as applied to an important class of
capital, see the essay on " Taxation of Corporations," in Seligman, Essays in Tax-
ation, pp. 254-258.

Incidence of Taxes on Capital 265

some forms of capital. That is to say, in the case of an
unequal tax on capital, it is generally the debtor and not the
creditor who suffers. How can this be proved ?

The rate of interest on capital can rise only through an
increase in the demand for capital or through a decrease in
the supply of capital. Some writers maintain that demand
will increase. It is claimed that if a tax be imposed on the
capitalist lender, and if, accordingly, the borrower be now
allowed to deduct from his taxable property the amount of
the loan, the borrower will be able to pay a higher rate of
interest. Since he is no longer taxed on the debt, he will
be able to lay aside more. This will increase his effective
demand for additional capital. Because of this increased
competition for capital, the rate of interest will rise, so as
to leave the creditor uninjured, notwithstanding the imposi-
tion of the tax. 1

This argument, however, as Rau has shown, is inadequate. 2
In the first place, it is not necessarily true that the borrower
is allowed to deduct his debts from his taxable property ; in
the American commonwealths it is frequently the rule that
debts cannot be deducted from personal property. Secondly,
even if debts are deducted, it does not follow that the compe-
tition for capital will increase ; for only a part of the debts
will have been contracted for industrial purposes, while a
portion will have been the result of losses or accidents. An
amelioration in the condition of the debtor will therefore just
as frequently result in a payment of old debts as in a con-
traction of new debts. Thirdly, if an increase of the debtor's
profits (due, for instance, to the exemption of the debt from
taxation) enhances the demand for capital, every decrease in
the rate of interest would do the same; and this increased
demand would counterbalance the decrease in the rate, so

1 This is the argument of Kroncke, Grundsatze einer gerechten Bestetierung,
1819, pp. 130-138. Cf. the same author's Ausfiihrliche Einleitung zur Reguli-
rung der Steuern, 1810, p. 35.

2 Rau, Finanzwissenschaft, 381, 382, vol. ii, pp. 156, 157 (5th edition). Cf.
also Pantaleoni, Traslazione dei Tributi, pp. 253-255.

266 Shifting and Incidence of Taxation

that interest could never permanently fall. But this is mani-
festly untrue. Hence the argument that a tax on capital
will increase demand is untenable.

On the other hand, the argument that the supply will
decrease is more successful; in fact, this is the real basis
of the whole theory of the shifting of the capital tax,
whether it be a tax on mortgages or on any other form of
loanable capital. The argument was first advanced by Tur-
got, 1 and rests really on the fundamental assumption of the
mobility of capital. Capital, it is said, shows its mobility in
two ways : if employed unremuneratively, it will be removed
or transferred either to some other industry or occupation
within the country, which affords higher gains because un-
taxed, or it will be removed to another country where the
same industry or occupation is not taxed. In other words,
there is both an internal and an international migration of
capital continually going on a migration from industry to
industry, and one from country to country. Capital, the
argument continues, always seeks to secure the highest
returns. Impose a tax on the capitalist lender, and he will
insist on an increase of the rate of interest tantamount to
the tax, or else will transfer his capital to some untaxed occu-
pation within or without the country.

But while it is abstractly true that a special tax on capital
will be shifted to the borrower, it often happens in practice
that the assumed absolute mobility of capital is countervailed
by other forces that may be summed up under the name of
economic friction. These opposing influences may be clas-
sified as follows: (i) ignorance of the capitalist; (2) diffi-
culty of removing the capital; (3) risk connected with the
migration to other countries; (4) social or other considera-
tions which make for permanence of investment; (5) legal
obstacles.

Ignorance of the capitalist, it may be confessed, is not of
very material importance. In a highly developed industrial

1 Turgot, " Observations sur un Memoire de M. de Saint-Peravy en faveur de
1'Impot Indirect," in his (Euvres (Daire's ed.), i, p. 423. See above, p. 109.

Incidence of Taxes on Capital 267

organism, under the modern regime of interchange of thought
and communication of news, the fact of extraordinary profits
in any particular occupation cannot be long concealed. Espe-
cially the distinction which concerns us here that between
taxed and untaxed capital must be obvious to the average
investor. With the growth of modern society the ignorance
of the investor is a factor of continually decreasing moment. 1

More important is the difficulty of removing capital to more
lucrative employments. Of course, in the case of loanable
capital, as in the stock exchanges of to-day, this difficulty is
reduced to a minimum. But in proportion as the capital
assumes more and more of a fixed character, its mobility
grows gradually less. To transfer investments from one
stock to another is a very different matter from abandoning
all the plant and machinery in one business in order to enter
upon another occupation.

The risk connected with investments in foreign countries
is likewise not so great as it formerly was. It is indeed
true that creditors, as a rule, like to be near their debtors.
American capitalists prefer the less remunerative mortgages
in the East to the high interest-paying investments in the
Western states. Moreover, it frequently happens that home
investors or domestic corporations are treated more leniently,
both as regards taxation and in other respects, than foreign-
ers. It is the survival of the old law of aliens. This check
on interstate or international transfer of capital is, however,
gradually losing its potency.

Social considerations of various kinds often interpose a
more serious obstacle. It is not always strictly true, as Adam
Smith said, that " the proprietor of stock is properly a citizen
of the world, and not attached to any particular country."
Feelings of patriotism, of local pride, of desire of proximity
to friends, of long custom and old usage, sometimes play a
considerable role. Although they may be called non-economic

1 For a proof that it is of some importance, cf. Cliffe-Leslie, " On the Philo-
sophical Method of Political Economy," in his Essays in Political and Moral
Philosophy, pp. 235-237.

268 Shifting and Incidence of Taxation

motives, they are none the less to be reckoned with by the
economist.

Finally, the law may prevent the free migration of capital.
Under the American state bank laws, for instance, there was
very generally a provision that banks could invest their
deposits only in certain specified state securities or mort-
gages. The large demand for state mortgages in such cases
may have contributed toward lowering the usual interest
allowed on the mortgage, and may thus have prevented the
whole of the burden of the tax from being shifted to the
borrower.

While, therefore, it may be laid down as a general rule that
a tax on loanable capital will be shifted from the creditor to
the debtor, the conditions which interfere with the absolutely
free mobility of capital may be sufficiently strong to prevent
this transference of the tax from becoming entirely complete.
The application of this principle to the great question of
taxation of mortgages in the United States is obvious.

3. The Incidence of a Capital Tax as between Producer and

Consumer

This is practically the same as a tax on profits. The
investor of capital in a productive industry does not make
any but an arbitrary distinction between his interest and his
profits on the investment. The rate of interest is fixed by
the relative amount of loanable capital, that is, it is a matter
of adjustment between borrower and lender. But as soon as
it becomes a question of adding the tax to the price of the
goods the problem is the same as that of the tax on profits.
This topic is of sufficient importance to demand a separate
chapter.

CHAPTER V
TAXES ON PROFITS

IN discussing the incidence of a tax on profits, as between
producer and consumer, it is necessary to make several dis-
tinctions. Profits may be taxed directly, as when the tax
is imposed on the net receipts or profits of the producer ; or
they may be taxed indirectly, as in the case of a fixed license,
or of a tax on stock in trade, or of a tax on sales. Taxes on
sales, however, may themselves be subdivided into two cate-
gories. The producer may, in the one case, be taxed on the
amount of commodities produced or sold by him. This is
equivalent to a so-called indirect tax on commodities. It is
immaterial, from the standpoint of incidence, whether such a
tax is raised from the producer or from the consumer. In
the other case, the producer may be taxed, not on the quantity
produced, but on the gross receipts from sales which is
not necessarily the same thing. As an indirect tax on
profits, a tax on gross receipts occupies, as it were, an inter-
mediate position. It is, in some sort, a cross between a tax
on net receipts and a tax on the quantity sold.

Consequently, if we use the term " profits " in the wider
sense, to signify the revenue which accrues from the sale
or exchange of commodities, there are really four chief kinds
of taxesfcwhich affect profits and thus influence the relation
between producer and consumer. These are :

1. A tax varying with gross production or gross amount
sold.

2. A tax varying with gross receipts.

3. A tax varying with net receipts.

4. A tax of fixed amount.

269

2 70 ' Shifting and Incidence of Taxation

I. A Tax on Gross Production or Gross Amount sold

This is practically the same as a tax on commodities.
Whether the tax is a so-called "indirect" tax, levied on the
commodities, or whether it is levied on the producer accord-
ing to each unit produced or sold, is immaterial. Thus, in
some of the American commonwealths, the taxes on sewing-
machine companies or telephone companies are proportioned
to each sewing-machine or telephone sold or produced. This
is the same, so far as the question of incidence is concerned,
as if an indirect tax had been levied on each machine or
telephone.

Let us mention first the case of a tax on particular com-
modities produced or sold under the law of competition.
This case is the normal one which has been treated above in
the chapter on general principles. We have, therefore, only
to repeat the general conclusions there reached, 1 namely,
that the tax is apt to be shifted to the consumer in whole or
in part, but that the degree to which the tax is shifted varies
inversely as the elasticity of the demand and directly as the
elasticity of the supply.

In most cases the tendency of an increase in price is to
diminish the demand and, therefore, the output ; but if the
falling off in demand is so slight that the former marginal
producer still remains the marginal producer, or if the margin
between the price and the cost to the more efficient producer
is so slight that he cannot crowd out the former marginal
producer, then the whole of the tax will be shifted to the
consumer. This is a frequent case perhaps even the ordi-
nary case under the regime of competition. But conditions
may arise under which only a part of the tax will be shifted.
These conditions will be present when an industry has not
only reached the point of diminishing returns, but has for
some time been obeying that law, so that any increase of
price due to the tax will lead to a smaller output with a lower

1 Above, p. 213.

Taxes on Profits 271

marginal cost, and therefore to a new price below the old
price with the whole tax added. 1 But the same result the
incomplete shifting of the tax will follow when, owing to
the imposition of the tax, the former marginal producer is
now replaced by a new marginal producer who can supply
the product at a lower cost, and when the new price will now
be a little (or perhaps even much) less than the old price, or
the old marginal cost, with the tax added. The ordinary
conditions of progress, as we know, result in a continual
crowding out of the marginal producer by more favored com-
petitors. This process will be accelerated, and the marginal
producer will be replaced more quickly, as we have seen :
first, when the demand for the commodity is very elastic ;
second, when there is a great difference in the efficiency of
the various producers ; and third, when the industry obeys
the law of increasing rather than of diminishing returns. 2

To the extent that the imposition of a tax hastens this
process, the tendency will be that somewhat less than the
whole of the tax will be shifted. For the entire tax will
be shifted only so long as the old marginal producer still
remains. To what degree, now, will a tax accelerate this
process ?

A tax on output that is, on each unit produced will
normally affect the elasticity of the demand, and thus the
amount produced. If this diminution of output is divided
proportionally among all competitors, it will not change their
relative positions. But if there is a great difference in the
efficiency of the various producers, and if the imposition of
a tax, by making it more difficult for the marginal producer
to hold his own, brings about a greater diminution in his
output than in that of his competitors, the tendency for the
larger producer to crowd out the smaller will be accentuated;
and, because of the economies in production, somewhat less
than the entire tax will be added to the price. If, however,
the movement toward concentration goes far enough to pro-
duce a complete monopoly, price will be fixed by conditions

1 See above, p. 208. 2 See above, pp. 202, 203.

272 Shifting and Incidence of Taxation

of monopoly value to be discussed in a moment ; and while
ordinarily only a part of the tax or the whole tax will be
added to the price, exceptional cases may occur where the
monopoly is so secure and the demand so stable that the
new price may even exceed the old price with the tax added.
A good example of such an exceptional result is the match
tax during the Civil War. 1

When the competitive industry obeys the law of increasing
returns, it is necessary to make a distinction. The fact that
an industry is subject to the law of increasing returns tends,
as we know, strongly toward concentration ; but as long as
the old competitors -are left that is, in the interval during
which the old marginal producer continues to produce the
smaller output, due to the imposition of the tax, will be sup-
plied at a higher marginal cost, and the new price will not
tend to be less than the old price with the tax added. 2 But
after the process has been completed if it is ever com-
pleted and the industry is now monopolized, the price may
not be quite so high as before, because under conditions of
monopoly, other things being equal, the influence of the law
of increasing returns is to raise the price by somewhat less
than the tax. 3 The interesting corollary from the above con-
siderations is that in the transitional cases of competitive
industries subject to the law of increasing returns, the ten-
dency toward monopoly is checked rather than accelerated
by a tax on output ; while, in the usual case of competitive
industries subject to the law of diminishing returns, the im-
position of a tax under certain conditions at least may
weaken the forces that oppose the tendency toward mo-
nopoly and may make it more difficult for the small producer
o remain in business.

We may sum up, therefore, by saying that in the case of
competition the usual result of a tax on output or gross
amount produced or sold is that the entire tax will be shifted
to the consumer, but that special cases may arise where the
price will be augmented by only a part of the tax. Such

1 See below, p. 283. 2 See above, p. 207. 8 See above, p. 205.

Taxes on Profits 273

special cases are chiefly to be found not only when the
industry has been obeying the law of diminishing returns,
but also when the tax enables a more capable producer to
undersell his former competitors at the margin of profitable
production.

We come next to the case of a monopoly. The law of
monopoly value is, we remember, in some respects different
from that of competitive value. The monopolist will always
demand the very highest price at which he can sell the great-
est number of products. To the extent that his monopoly is
complete he is uninfluenced by the fact that the article might
be produced more cheaply by others, a consideration of
vital importance in the whole domain of competitive prices.
So far as concerns the incidence of the particular tax with
which we are at present dealing namely, that on gross pro-
duction or on commodities the monopolist and the com-
petitive producer are, however, in some respects subject to
practically the same influences.

If a tax is imposed on every article produced, the monopo-
list may prefer to restrict his production and to raise his price.
Although he sells less than before, because of the increased
price, his net profits may be larger, because he pays a smaller
tax than he would pay if he produced more extensively. Al-
though his gross receipts diminish, his expenses diminish still
more. If the tax is small and the demand is apt to fall off a
great deal with an increase of price, the monopolist will be
likely to find it profitable to bear more of the tax himself. If,
on the other hand, the demand is less elastic, he will be apt
to shift more and more of the tax to the consumer. The
degree to which he will add the tax to the price depends
chiefly on the height of the tax as compared with the extent
of the production and the elasticity of the demand. In these
respects the influence of a tax under conditions of monopoly
is akin to that of a tax under conditions of competition. On
the other hand, when the minor qualification of the ratio of
product to cost is introduced, the analogy between conditions
of monopoly and competition disappears. As we have seen,

274 Shifting and Incidence of Taxation

if the monopoly industry obeys the law of increasing returns,
the tendency is that less of the tax will be added than if it
obeys the law of diminishing returns; while in the case of
competition the tendency is the reverse. 1 Since the existence
of the law of increasing returns is most favorable to the con-
tinuance of a monopoly, and since the great mass of so-called
economic monopolies have become such precisely because
they are subject to the law of increasing returns, the con-
clusion is warranted that in the ordinary cases of these
monopolies when a tax is imposed on gross product, even
though the monopolist shifts a part of the tax to the con-
sumer, he will shift less of the tax than he would have done
had he produced under conditions of competition.

The important point to be noticed, however, is that in the
case of the taxation of gross product the monopolist may,
and generally will, shift the tax to the consumer, even
though he shifts less of the tax than would be the case
if he were not a monopolist. We shall very soon see
that in the case of some other taxes there is, in respect
to the question of incidence, a sharp line of distinction be-
tween monopoly price and competitive price. Even in the
case of the tax on gross product, however, there are some
differences between the regime of monopoly and of competi-
tion. One of these differences is connected with the consid-
eration of the ratio of product to cost, which has just been
mentioned. Another is that, in the case of monopoly, while
the tax will ordinarily be shifted in whole or in part, it may
happen that no part of the tax will be shifted at all. 2 Let

1 See above, pp. 203-210.

2 Professor Graziani, in his Istituzioni di Scienza delle Finanze, p. 335, sub-
stantially accepts, on this particular point, the argument in the text. Professor
Edgeworth, who originally criticised the statement in the text in the Economic
Journal, vii, p. 227, made the same criticism of Professor Graziani's subsequent
acceptance of this position in a review of the latter's work in the Economic
Journal, vii, pp. 405, 406. Professor Graziani came to the defence of his posi-
tion in a reply entitled Sulla Repercussions delle Imposte net Cast di Monopolio,
published in the Studi Senesi, xiv, p. 5, and also separately (Turin, 1898). A
rejoinder to this by Professor Edgeworth appeared in the Economic Journal, viii,
pp. 234-236.

Taxes on Profits 275

us proceed to consider this possibility somewhat more in
detail.

Let it be assumed that a monopolist can sell, at the price
of $5 each, 1000 units of a particular article. Let it be
further assumed that the cost of each unit is $2. His gross
receipts will then be $5000, and his net profits (5 2) x 1000
= $3000, which may be declared to be his maximum mo-
nopoly revenue. If he charged more, the sales would fall
off; if he charged less, the receipts would be smaller. In
either case his net profits would diminish. Let it be assumed
that, if he charged $6 a unit, the sale would fall off to 700
units. His gross receipts would be 6 x 700 = $4200, and his
net profits (6 2) x 700 = $2800, or less than before. If, on
the contrary, he charged only $4 a unit, his sales would in-
crease, let us say, to 1200 units, his gross receipts would be
$4800, and his net profits (4 2) x 1200 = ^2400. He will
therefore always prefer the price $5, which marks the point
of maximum monopoly revenue.

If the government now imposes a tax of $i a unit, what
will be the result ? The net return on each unit is reduced
to $2, the total net profits to $2000. If the monopolist at-
tempts to add the whole tax to the price, he will sell only 700
units ; and since the cost per unit has been increased by the
tax to $3, his net profits will be 700x^(6 3) =$2100. Grant-
ing that this is the highest net return that the new conditions
admit, the monopolist will increase the price from $5 (which
gives him $2000 profits) to $6 (which gives him $2100 profits).
The entire tax will be shifted to the consumer.

On the other hand suppose that the tax is only ^ of
a dollar. Then the cost per unit would be $2^, the net
profits at price $5 would be (5 2j) x 1000 = 2| x 1000
= $2750 ; while the net profits at price $6 would be (6 2^)
X 700 = sf x 700 = $2625. Admitting that other prices
yield profits likewise inferior, the monopolist would con-
tinue to charge only $5 ; that is, he would not raise prices at
all.

It might be said, however, that the admission in the last

276 Shifting and Incidence of Taxation

sentence is not permissible. 1 A simple arithmetical example,
however, will show that the conditions may arise under which
any other price than the original one would give the monopo-
list less net profits.

Let it be assumed that, instead of adding the whole tax to
the price, the monopolist adds only part of it. Let it be fur-
ther assumed that at price $5^ he will sell goo units ; at price
$5j, 825 units; at price $5f, 750 units; and, as we have
already previously stated, at price $6, 700 units. His net
profits, then, after a tax of of a dollar had been imposed,
would be :

At price 5 . . . (5 - 2|) x 1000 = 2f x 1000 = $2750.

At price $ . . . (si - 2^) x 900 = 3 x 900 = $2700.

At price si. . . (5i-2j)x 825 = 3i x 800 = $2681.25.

At price sf . . . (5i~2|)x 750 = 3! x 750 = $2625.

At price 6 . . . (6 - 2|) x 700 = 3f x 700 = $2625 .

In other words the monopolist will continue to find his
greatest profits in continuing to charge the original price, $5.
It is clear, therefore, that cases may arise in which it will be
profitable for the monopolist to bear the burden himself. 2
No part of the tax will be shifted to the consumer.

1 Professor Edgeworth, for instance, urges this criticism. The only cases in
which it is possible for the monopolist to bear the whole tax himself, says he, are
(0 ) when it is not in the power of the monopolist to increase his output, and ()
when the monopolist is the sole buyer. Cf. Economic Journal, vii, p. 227. That
these are not the only cases, however, is clear from the argument in the text.

2 Cournot states that the tax must always be shifted (except in the cases men-
tioned in the preceding note). Professor Edgeworth (Economic Journal, vii,
p. 405) thinks that this is true " in general." Later, when hard pressed by Pro-
fessor Graziani, he seeks to maintain his position by assuming that " the change
of price is small," "by taking A/ sufficiently small" (Economic Journal, viii,
p. 235). But is it fair to assume that a small change of price is " more general "
than a great one? And would Professor Edgeworth's elaborate formulae all hold
good, if the change of price were substantial? It is not denied that, if we varied
the figures in the text, it might happen that when the cost per piece were 2.\, the
price which yields maximum profit might become greater than 5. What it is
sought to prove by the above illustration is that this result does not necessarily
follow. We venture, therefore, still to cling to the position in the text, notwith-
standing that, in the opinion of Professor Edgeworth, the opposite point has been
" proved formally and mathematically by Cournot, informally and in plain prose "
by himself. See Economic Journal, vii, p. 405, note I. Knut Wicksell, on the

Taxes on Profits 277

Granting, however, that this is exceptional, and that in
ordinary cases the monopolist will shift at least a part of the
burden, it was stated above 1 that the more elastic the demand,
the smaller the proportion of the tax that he would be apt to
shift to the consumer. It may be wise to illustrate this also
by some simple arithmetical figures. 2

Demand is said to be more elastic when each successive
increase of price leads to a greater falling off in demand.
The example above was based on the assumption that, at the
price of $6, the demand would fall to 700. Let us now
assume that, with a more elastic demand, the sales at price
$6 would fall off as far as 675 units; and let us further
assume that, with a more stable demand, the sales at the price
$6 would fall off only to 725 units. Now, with the more
elastic demand, the net profits would be, after the tax of $i
per unit was imposed (6 3) x 675 = $2025 ; but with the
less elastic or more stable demand, the net profits would be
(6 3) x 725 = $2175. Hence, the more stable the demand,
the greater the chances of his increasing the price by the
whole tax. 3

The validity of this statement may be seen from a reductio

other hand, thinks that, theoretically, the monopolist will always add the tax to
the price, but that practically he will often not do so. Finanztheoretische Unter-
suchungen, p. 12.

1 See p. 204.

2 Especially because the proposition has recently been assailed, again by Pro-
fessor Edgeworth, in Economic Journal, vii, p. 227, note 4, and in his criticism
of Professor Graziani's acceptance of the above contention in ibid., vii, p. 406,
and viii, pp. 237, 238. For Professor Graziani's rejoinder, see Sulla Repercus-
sione, etc., pp. 6, 7.

8 It is not permissible to say that, if this were true, the monopolist would have
raised the price before the imposition of the tax. For, according to our hypoth-
esis, the net profits at the original price of $5 were $3000; and with a sale of
725 units at the price of $6 without the tax, his real profits would still be only
(6 2) x 725 = $2900. It is only when the elasticity is indefinitely small that
such a result would follow. As Professor Edgeworth observes, we must assume
some elasticity, for otherwise equilibrium would not have been reached. The
monopolist would have gone on raising prices until checked by a sensible elas-
ticity. The objection urged by Knut Wicksell, Theoretische Untersuchungen,
p. 12, is therefore not well taken.

278 Shifting and Incidence of Taxation

ad absurdum of the opposite. Suppose it were true that, the
more elastic the demand, the greater the chance that the
monopolist would add the tax to the price. Then it would
follow that, if at the price of $6 the demand fell off to 500,
the net profits of the monopolist would be (6 3) x 500
= $1500; if to 400, then (6 3) x 400= $1200; if to 300,
then (6 3) x 300 = $900, and so on. In other words, the
monopolist would, in each case, prefer the smaller net profits
to the higher ones which is absurd. 1 , It remains true,
therefore, that the degree to which the tax will be added to
the price varies, other things being equal, inversely with the
elasticity of the demand. *

We see then that the validity of the general law as stated
above 2 is substantiated, and that in the case of monopoly the
degree to which the price will be increased by a tax depends

(upon the height of the tax as compared on the one hand
with the ratio of product to cost, and on the other hand with
the elasticity of the demand.

If we consider the ulterior effects of a tax on the gross
product of a monopoly, some interesting conclusions force
themselves on our attention. Let us take up those cases in
which the monopolist will generally add the tax to the price.
To this extent he will have shifted the tax to the consumer ;
but that does not mean that he suffers no loss. On the con-
trary, since the increased price means reduced sales, the net
profits of the monopolist will, as we have seen, be smaller
than before the tax. He therefore loses also. The tax he
pays to the government is, indeed, smaller than it would have
been if he had continued to produce as much as before ; and
in this sense we can speak of a partial evasion of the tax.
That is, taking the figures used above in the illustration of
normal conditions, the tax of $i per unit amounts to $1000

1 The error of Professor Edgeworth seems to consist in the assumption that
the demand curve is continuous, that, if an increase of price leads to such
a sudden falling off in demand, a decrease of price will lead to a similar jump in
demand. But this does not necessarily, or even ordinarily, follow. Cf. the con-
siderations below, p. 287.

2 See p. 273.

Taxes on Profits 279

when 1000 units are sold ; but since the change of price from
$5 to $6 cuts down the sales to only 700 units, the govern-
ment then receives only $700. The producer thus evades
the tax to the extent of $300, but he also suffers a consider-
able loss. For, while his net profits before the imposition of
the tax were $3000, his net profits, after he raises the price
by the entire amount of the tax, are only $2100. He thus
loses $900, although he technically shifts the tax. Moreover,
the consumers also lose. Those who pay the increased price
can measure their loss in dollars and cents ; for, if the tax is
shifted completely, they pay the total amount of the tax.
Those who have been compelled, by the increase of price, to
forego the article and to content themselves with something
inferior, also suffer a loss, even though it cannot be definitely
expressed. The only persons who gain are the producers of
the new commodity which some of the consumers now sub-
stitute for the old one. This gain, however, which also
cannot be expressed numerically, will ordinarily be smaller
than the loss suffered by the producers of the original article.
Even though a tax on gross product be shifted to the con-
sumer, in the sense of causing a rise in price, it is apt to
inflict a loss on the producer as well as on the consumer ; and
this loss to both classes may exceed the total yield of the tax
to the government. In the above extreme case the pro-
ducers lose $900, the consumers, whose loss can be computed
numerically, lose $700, or $1600 together, while the tax
yields only $700. The possible dangers of taxes on gross
product are thus apparent. 1

1 The above reasoning may be illustrated graphically as well as arithmetically.
Fleeming Jenkin, " On the Principles which Regulate the Incidence of Taxes," in
Proceedings of Royal Society of Edinburgh, Session 1871-1872, p. 624 (republished
in Papers, Literary, Scientific, etc., by the late Fleeming Jenkin, edited by Colvin
and Ewing, 1887, " P- I1[ 3)> made use of the diagram on the next page.

FN is the demand curve, PE the supply curve, CO the amount of tax per
unit. Then OM is the market price to the supplier, OM f the market price to the
buyer, and MM' the tax.

The amount raised by the tax is MCCM', the portion paid by the seller
CC"MM, the portion paid by the buyer C''C'M'M". The whole loss to the
community is MCDC'M', the loss to the sellers CDM"M, the loss to the buyers

280

Shifting and Incidence of Taxation

The case of a bounty is just the reverse of a tax. It can
be proved in the same way that, while a bounty ordinarily
benefits only the producer and brings no advantage to the
consumer, cases may possibly occur where the result of a
bounty will be not only an increase of the profits of the
producer, but also a decrease of the cost to the consumer.
This is the reason why bounties have generally been given ;
namely, to educate the producer to that point where he may
find it profitable to reduce prices. But these instances are
very exceptional, just as was the preceding case of a tax
that cost the producer and the consumer far more than it
yields to the government. Such cases, moreover, cannot be
advanced as arguments in favor of the policy of bounties in
general ; for, ordinarily, the loss occasioned to the taxpayers
who pay in taxes the amount distributed as a bounty more
than outweighs the benefits to the special classes who are

M U DC1W. Both buyers and sellers suffer a loss beyond the tax. The sellers
suffer a loss CC"D, the buyers suffer a loss C'O'D. If the tax is large, CO will
approach the axis OX. Then the tax will be unproductive, and the excess of loss
to buyers and sellers, COD, will be large.

Of course, according as the industry obeys the law of constant returns, or of
increasing returns, the supply curve PE will tend to curve differently. Conversely,
according to the elasticity of the demand, the demand curve /Wwill tend to be
parallel to EO. Jenkin did not modify his diagram to meet these conditions.
But Professor Marshall has made the changes in his Principles of Economics,
3d ed., pp. 523-525, to which the reader is referred. Marshall, however, applied
his diagrams only to consumers' rent, i.e. to what Jenkin called O C u D. It is
equally applicable to the producers' rent. The whole analysis is outlined by
Cournot in his Principes Mathematiques, pp. 78-82 (English translation, pp.
71-75), and more especially in his Principes de la Theorie des Richesses, pp. 374-
378. But so far as concerns the laws of decreasing and increasing cost, the reader
is reminded of the discussion above, pp. 204-206.

Taxes on Profits 281

deemed to derive a benefit from the bounty. It is for this
reason that modern governments grant bounties only in the
exceptional instances mentioned above.

Returning now to the consideration of taxes on gross prod-
uct in general, irrespective of the fact whether the industry
is subject to the law of monopoly or of competition, attention
must be called to a point in which many have committed a
serious error. Cournot, for instance, maintained that a tax,
whether on a monopoly or on a competitive commodity, may
raise the price to an extent greater than the amount of the
tax. /The chief reason he advanced for this phenomenon
was that the price paid by the consumer must include not
only the tax but the interest on the sum necessary to pay the
tax, and the profits of the middlemen. The necessary con-
clusion was that it is always wiser to assess the tax at as
late a stage as possible that is, on the consumer himself
since the collection of the tax becomes more costly, more
vexatious, and more burdensome to the community in propor-
tion as the assessment of the tax approaches the producers.
The consumers will have to pay more than the government
receives. 1

This theory of Cournot is, however, nothing but the
accepted doctrine of Adam Smith, Ricardo and Mill.
Adam Smith puts the idea into the plainest form when he
says :

" A tax upon these articles (necessaries of life) necessarily
raises their price somewhat higher than the amount of the
tax, because the dealer who advances the tax must generally
get it -back with a profit. His employer, if he is a manu-
facturer, will charge upon the price of his goods this rise
of wages, together with a profit; so that the final payment
of the tax, together with this exchange, will fall upon the

1 Cournot argues on p. 78 of the Principes Mathematiques (English translation,
p. 70) that, owing to the " additional charges arising from interest," " the com-
modity will be sold at a higher price just in proportion as the tax is prematurely
collected." Cf. the corresponding statement in his Principes de la Theorie des
Richesses, p. 273, as to competitive conditions.

282 Shifting and Incidence of Taxation

consumer. The final payment of both the one and the
other (taxes on necessaries and on labor) falls altogether
on themselves (the consumers) and always with a consider-
able overcharge." l

So also this is what Ricardo means when he says that
" the taxing of all commodities will raise the price by a sum
at least equal to the tax," 2 a remark which, as we have
seen, is not necessarily true. So Du Puynode, Parieu and
many other writers make the same statement.^ Fawcett
calls this the most serious objection against taxes on com-
modities. 3 \y

This whole theory rests on the old doctrine of normal or
natural profits. As soon as we remember that, according to
the modern theory, actual profits are simply the surplus over
marginal cost, the doctrine falls to the ground. The middle-
man cannot add his profits to the price, because in a state of
competition price is fixed at any given moment at the cost of
the most expensive increment. If there were such a thing
as normal profits, the price of the article would indeed be
increased with each transfer, until the ultimate price might
immensely exceed the tax. But there is, under competitive
conditions, always a producer or middleman on the margin of
production that is, one who produces or handles the prod-
uct without profits, simply getting back his expenses
and the price of the whole supply, at any given moment, is
equal to his cost of doing the business. The profits are

1 Wealth of Nations, book v, chap, ii (Rogers' ed., ii, pp. 468-470).

2 Principles of Political Economy and Taxation, chap, xvii (McCulloch's ed.,
p. 1 86). Cf. Mill, Principles, book v, chap iv, 2.

8 Du Puynode, De la Monnaie, du Credit et de VImpot, ii, p. 2IO; Parieu,
Traite des Impbts, i, p. 165; Sayer, The Income Tax, 1833, pp. 58, 59; Fawcett,
Political Economy, pp. 550, 551 (6th ed.). The most recent repetition of the
statement is by Sidney and Beatrice Webb in their Industrial Democracy, 1898,
P- 33- " At every ' repercussion ' of the tax, there would be an additional ' load-
ing,' so that the ultimate charge to the consumer would, as in the case of excise
duties on raw materials, far exceed the original sum."

The theory itself may, as we know, be traced back to a period anterior to
Adam Smith. It is found in Fauquier, in Decker and in other writers of the
time. See above, pp. 17, 56.

Taxes on Profits 283

obtained only by the more fortunate or more skilful indi-
viduals. The mere fact that the product passes through a
number of hands cannot in itself raise the price by more
than the exact cost of such transference. Cost, however,
does not include profits; cost is the condition of profit.
Otherwise retail prices would increase geometrically, accord-
ing to the number of retailers a conclusion which is obvi-
ously untrue. The tax is simply an addition to the cost of
production ; and there can be no geometrical increase in the
tax. As soon as we abandon the normal profits theory, then
we see how inaccurate is the excess-of-price-above-tax doc-
trine. The doctrine assumes not only that the producer is a
monopolist, but that every middleman is a monopolist also.
Only on this assumption can there be no no-profits middle-
man. The assumption, however, is not practicable in treating
conditions of actual life. 1

There is, indeed, one way in which the price of an article
may be driven up beyond the amount of the tax a way
suggested in the last sentence, but involving considerations
very different from those just discussed. Since a tax on
production or on commodities must generally be advanced
before the producer has received payment for his sales, the
necessity of raising the funds will bear more heavily on the
smaller producers. In fact, under given conditions of elas-
ticity of demand, such a tax, especially if it be high, tends
to increase the advantages of the powerful producer. When
the conditions are sufficiently favorable, the imposition of a
tax may thus be the direct cause of the creation of monopoly.
But it is then primarily the monopoly, and only indirectly
the tax, which enables the producer to raise the price far
above its previous level. Conversely, the repeal of a tax may
reduce the price by an amount far greater than the tax,
because what was formerly a monopoly may now become
subject to competition. As a good example of this tendency
may be mentioned the tax on matches in the United States

1 Cf. Gunton, Principles of Social Economics, p. 380. His conclusions are in
other respects, however, questionable.

284 Shifting and Incidence of Taxation

during the Civil War, the imposition of which created a
monopoly with high prices, and the abolition of which caused
a fall in price considerably greater than the amount of the
tax. Again, the proposed reduction of taxes on. certain com-
modities for example, tobacco was opposed in the United
States by the large manufacturers and importers, because
the higher the tax the greater the advantage of the large
dealer. But it is primarily because of the monopoly, and
only indirectly because of the tax, that prices are thus raised
unduly. 1

The whole question of the incidence of import or export
duties is virtually identical with the one discussed in the
preceding cases; for import and export duties are usually
levied at given rates per units of the commodities, whether
the units be those of weight or of value; that is, whether
the rate be specific or ad valorem. It will be readily seen,
therefore, how erroneous is the doctrine of those extremists
who maintain that the loss to the consumer is always and
necessarily measured by the proceeds of the import duties.
On the contrary, it may happen that prices will rise by some-
thing less than the tax ; and it is conceivable, although not
probable, that prices may not rise at all. When, for example,
the foreign producer fears that the increase of price by the
total amount of the tax will so materially reduce his sales as
to render his net profits lower than they would be if he
assumed a part of the tax himself, prices may rise by some-
thing less than the tax. On the other hand, it may happen
that the loss to the consumer will be more than the amount

1 There is another case in which a tax may increase the price of a commodity
by more than the amount of the tax. This is the case where a smaller tax is
imposed on the producer of a larger quantity of units than on the producer of a
smaller quantity. In industrial operations in general such a tax is well-nigh
unknown. It would be what the French call an " upside down progressive tax."
But in agriculture it has happened that a uniform tax is imposed per acre, while
the productivity of the land varies. In such a case, the tax would involve a lower
rate, per bushel of wheat for instance, on the more productive land than on the
less fertile land ; and, as long as the less fertile land contributed a part of the
necessary supply, the price of the product would rise by more than the amount
of the tax. The case is worked out arithmetically above on p. 225.

Taxes on Profits 285

of the tax. It is impossible to lay down any exact and uni-
versal rule; attention must always be paid to the given
conditions of the particular case. The application of the
principle is so important, however, that it merits a fuller dis-
cussion, which will be reserved for another chapter. 1

2. A Tax on Gross Receipts

A tax on gross receipts must not be confounded with a tax
on sales (in the sense of a tax proportional to the number of
commodities sold) or with a tax on gross product. A tax on
sales or on product varies with the amount sold or produced.
But gross receipts may be larger with small sales than with
large sales, provided prices are higher. Conversely, gross
receipts may be smaller with large sales than with small
sales, provided prices are lower.

If we take up first the case of competition, it is clear that
there can be in the given market only one price that equiva-
lent to the cost of production of the dearest increment of the
temporary supply. Now a tax on gross receipts necessarily
increases the expenses of this dearest increment ; for the pro-
ducer at the margin of profitable production, whose gross
receipts afford him only a bare return for his outlay, without
any profits, must add the tax to his price, if he is to remain
as a competitor at all. In the end, therefore, the tax must be
shifted. The extent, however, to which the tax will be shifted
at any particular time will depend on the considerations that
were discussed in the case of a tax on gross product ; that is,
on the elasticity of the demand as compared with the elas-
ticity of the supply.

In the case of monopoly the same effects are also generally
observable. Although the increase of price will lead to a fall-
ing off in the demand, and although the gross receipts may
even be less than before, the net profits of the monopolist will
generally be greater, because of the diminution of the expenses
due to the decrease of the output, and because the tax on the

1 See below, pp. 300 et seq.

286 Shifting and Incidence of Taxation

reduced gross receipts will be less than it would have been
had the sales remained unchanged. 1

Although it is generally true that a tax on monopoly gross
receipts will raise prices, the conclusion does not necessarily
follow. 2 Cases may arise where it will be profitable for the
monopolist to bear the burden himself. The reasoning as
illustrated by the diagram in the note assumes that the falling
off of demand with increase of price is not only continuous,
but absolutely proportional, and that therefore the demand
curve may be represented by a straight line. But it is pos-

1 This general shifting of the tax, in whole or in part, can be illustrated by a
diagram.

At price OT\et OMbe sold; at price OF let 6Wbe sold.

Let gross receipts TCM = $10,000; let gross receipts O T' ON = $8990.
(These figures are chosen because they were the ones used in the first edition, in
the illustration which is discarded here for the reasons mentioned in the next
note.)

Let PP = line of cost. Let cost OPVM $7000. Let cost OPV'N= $6000.
Then net receipts at price OT= $10000 $7000 = $3000. Then net receipts at
price 07 V = $8990 $6000 = $2990. The monopolist, then, will prefer price OT.

Now impose a tax of one per cent on gross receipts. With gross receipts
$10,000, tax = $100. With gross receipts $8990, tax = $89.90. Net receipts
$3000 $100 = $2900; net receipts $2990 $89.90 = $2900.10. The monopo-
list will now prefer the price OT 1 .

S

N M

Hence, after the imposition of a tax on gross receipts, the monopolist will
prefer to raise the price. Here, as before, however, allowance must be made
for the elasticity of demand and for the ratio of product to cost.

2 In the first edition of this work the statement was made that such a tax could
never raise price. This was an error, due to inattention, in the particular illus-

Taxes on Profits 287

sible that the demand may fall off largely for the initial incre-
ments of price, and less largely thereafter. Let us utilize, in
other words, a hypothesis similar to the one already men-
tioned, 1 where, instead of the demand falling off by 100 units
for every one-quarter of a dollar added to the price, the
demand at price $5 amounts to 1000; at price $5^, to 900;
at price $5^, to 825 ; at price $5f, to 750; and at price $6, to
700. If a tax of ten per cent on gross receipts be now im-
posed, the figures will be as follows :

At Price Gross receipts io%tax

$5 .... 5 x $1000 = $5000 $500

5^ .... Six 900= 4725 472.50

51 .... 5| x 825= 4537.50 453-75

5f . . . . sfx 750= 4312.50 431.25

6 .... 6 x 700 = 4200 420

The expenses will be the cost of production plus the tax, or

At Price Cost of production plus tax equals total expenses

$5 . . . 2 X $1000 = $2000 + $500 = $2500

5i . . . 2x 900= 18004- 472.50 = 2272.50

Si . . . 2 X 825 = 1650 + 453.75 = 2103.75

5f. . . 2x 750= 1500+ 431.25 = 1931.25
6 . . . 2 x 700 = 1400 + 420 = 1820

Deducting from gross receipts the total expenses, we have
the net profits :

At Price Gross receipts minus expenses equal net profits

$5 ..-
Si-
5i-
5 f . . .
6 ...

tration, to the fact that cost changes with the amount produced. The error in
the original calculation has been pointed out by several writers, for example, by
Professor Ross in the Annals of the American Academy of Political and Social
Science, iii, p. 460; by Knut Wicksell in his Finanztheoretiscke Untersuchungen,
p. 14; by Professor Loria in his review of the work of Professor Graziani (who
had accepted the argument of the first edition) in the Giornale degli Economisti,
anno vii, p. 461 ; and finally by Professor Edgeworth in the Economic Journal,
vii, p. 228. But some of them, like the writer last named, go too far in asserting
that a tax on monopoly gross receipts must raise prices.
1 Above, pp. 275, 276.

$5000

- $2500

= $2500

4725

- 2272.50

= 2452.50

4537.50
4312.50

4200

- 2103.75
- 1931.25
- 1820

= 2433.75
= 2381.25
= 2380

288 Shifting and Incidence of Taxation

That is, the maximum monopoly revenue will as before still
be at price $5.

It is, therefore, possible, in the case of a tax on gross
receipts as well as in the case of a tax on each article sold,
that the monopolist may prefer not to raise the price at all.
Even if the price, however, is increased by reason of the tax,
as will ordinarily be the case, the same distinction must be
observed as that mentioned in the previous case of the taxa-
tion of gross product. 1 That is, since the great mass of
monopolies are subject to the law of increasing returns, while
the great mass of competitive industries obey the law of
decreasing returns, and since the action of the law of increas-
ing returns is to bring about a slighter degree of shifting in
the case of monopoly than in that of competition, it follows
that even if a tax on gross receipts induces the monopolist
to raise the price by a part of the tax, the tendency will be
for the producer to bear more of the burden himself than
would have been the case had he been subject to competitive
conditions.

3. A Tax on Net Receipts or Profits

In the case of a tax on the net profits of a monopolist, it
might be assumed that the tax will always be shifted to the
consumer because of his necessary dependence on the mo-
nopolist. This assumption, however, would be completely
false. It makes no difference whether the monopolized
commodity is one, the supply of which is strictly limited
and which is not reproducible at all, or whether the com-
modity is reproducible according to the law of constant,
diminishing or increasing returns. So far as the producer
is concerned, he cannot add the tax to the price ; for it may
be assumed that the monopolist producer will always demand
the highest price which the consumer is willing to give. If
the consumers were willing to pay more, he would have
increased the price before the imposition of the tax. /In

1 See above, page 274.

Taxes on Profits 289

other words, since monopoly price is always at the point
of greatest monopoly profits, a tax on these profits can never
\j increase the price. A tax on monopoly profits must, there-
fore, fall wholly on the monopolist.

In the case of competitive net receipts, we must distin-
guish between an exclusive and a general tax on profits.
A tax on the profits of some particular occupation must, in
the long run, be shifted to the consumer, provided that the
commodity continue to be produced at all. For if the tax
rests on the particular profits, the producers will be put at
a disadvantage as compared with those engaged in other
industries. There will be a gradual migration of capital to
find the most profitable level, and the original industry will
gradually be deserted. In the long run, therefore, either the
tax will be shifted to the consumer or it will lead to a ces-
sation of production. In the one case, consumers suffer
through increase of price; in the other case, they suffer
through destruction of consumption. But in no case will
the burden ultimately rest on the permanent producer.

We must, however, not forget the following important
practical point, which seems to have been overlooked by
many. To the extent that the theory of the mobility of
capital is not applicable, "the long run" will not occur.
When the fixed capital forms a large part, and the circulat-
ing capital a small part, of the entire investment, final equi-
librium can be brought about only through the ruin and
disappearance of the producer. Even where the capital is
ultimately transferred, the intermediate effects are often the
most important ones. What may be in a sense unimportant
from the standpoint of national economy, may be supremely
important from the standpoint of individual economy. When
we say that taxes cannot, in the long run, remain on the
producer, we generalize the conception. The producer
merely represents a class of individuals who never dis-
appear. But when we speak of the producers during any
interval, we refer to certain individuals. The welfare of
producers as a class is something very different from the

290 Shifting and Incidence of Taxation

welfare of an actual producer. Producers as a class ulti-
mately may contrive to obtain certain average returns ; but
this may be rendered possible only by the complete ruin of
the individuals who are now engaged in production. So far
as inequalities of taxation are not constant inequalities, this
process will continually repeat itself. The optimistic theory
is as much out of place here as it is in the other domains of
economic science. 1 In other words, even an exclusive tax on
profits may at any given time, under certain conditions, rest
on the original taxpayer until he has been entirely driven
out of the field. The only result of a tax on profits might
then be completely to stop the production of the commodity
or the continuance of the business. The consumer would
then suffer not through the increase of price, but through
the inability to procure the commodity at all.
. A general or universal tax on profits, in the sense of a
uniform tax on profits, does not, strictly speaking, exist any
more than a general or uniform tax on all capital. 2 But a

1 Cf. above, p. 230, the discussion of the incidence of the tax on the net profits
of land. The qualification to the general doctrine as to the incidence of exclusive
taxes is admirably expressed by Cliffe-Leslie in the following passage : " Another
incidence of a number of taxes on the working classes as producers has been con-
cealed by the doctrine that taxes on particular commodities and particular employ-
ments fall on consumers only, not on producers. The theory of taxation abounds
in examples of the danger of the abstract and hypothetical method of reasoning
in economics. The economist sets out with an assumption surrounded with con-
ditions and qualifications, and perhaps itself open to question, such as that in the
long run, and on the average, the profits of different occupations tend to equality,
and presently forgetting all his qualifications and conditions, concludes that the
profits of individuals must be equal; and therefore all special taxes advanced by
producers must come back to them with equal or average profit. Individual
profits really, in almost every business, vary from enormous gain to absolute loss.
Mill says : ' That equal capitals give equal profits, as a general maxim of trade,
would be as false as that equal age and size give equal bodily strength.' Never-
theless it is taken for granted that every special tax on a business is received ' with
average profit,' though the net result of all a trader's advances is not unfrequently
ruin; though all such taxes give an advantage to the larger capitalists. . . ."
" The Incidence of Imperial and Local Taxation on the Working Classes." In
Essays on Moral and Political Philosophy,, 1879, p. 196. In the 2d ed., under
the title Essays in Political Economy, this passage is found on pp. 388, 389.

2 See above, p. 262.

Taxes on Profits 291

tax may practically affect so many classes of producers in
a given community, and so many different kinds of profits
more or less removed from liability to competition from
foreign sources, that we are justified in setting up the con-
ception of a general tax, in contrast with an exclusive tax, on
profits. Such a general tax on net profits can never be ^ '
shifted. If profits represent the surplus above cost of pro-
duction, a general tax on this surplus cannot influence the
cost of production. Price cannot be altered, and the inter-
ests of the consumer cannot be affected. It is the producer
who bears the tax, both immediately and ultimately.

Some writers, indeed, like Cournot, have asserted that
the ultimate effects on the consumer may be bad, because
the tax restricts the producers' consumption, and because the
employment of the proceeds of the tax is generally less
profitable than if the proceeds had remained in the hands
of the producer. But this reasoning seems to be defective.
It takes for granted that taxes are used unproductively, and
it leads logically to the aphorism of Say that the best taxa-
tion is that which is least in amount. So far as govern- y
mental expenditures are necessary and judicious, they are
useful and productive ; and it is not permissible to assume
that private expenditure is more beneficial than public expen-
diture. Everything depends on the nature of the expendi-
ture, and on the general views as to the duty and limits of
governmental activity. To say that a tax on profits is injuri- ;
ous to the consumer seems to involve a begging of the ques- \
tion. The whole problem, moreover, is not peculiar to a
tax on profits, nor is it any longer a problem of incidence :
it belongs properly to the wider discussion of the general
influence of taxation.

One practical inference from the above discussion may be
used in connection with the controversy in the United States
as to whether corporation taxes should be levied on gross or
on net receipts. Whether these be monopolies or not, the
a priori conclusion in favor of taxation of net receipts l is fr^

1 See Seligman, Essays in Taxation, pp. 198-205.

292 Shifting and Incidence of Taxation

strengthened by the results of this discussion. In the par-
ticular case of transportation companies, for example, around
which most of the wordy warfare and the practical contest
have waged, it is more likely that the travellers and shippers
will feel a tax on gross receipts than one on net receipts.

4. A Tax of Fixed Amount

It may happen that a tax is not assessed according to net
profits, gross receipts or sales, but that it is imposed in the
shape of a lump sum on all the producers in the industry.
This is the common, although not the universal, rule with
the American license taxes. No matter how large the profits,
the tax remains the same.

In the case of a monopoly, such a tax necessarily falls on
the monopoly profits. For the very same reasons that were
advanced above, in the discussion of a tax on monopoly
net receipts, the tax cannot be shifted. It is always the
monopoly revenue that suffers.

In the case of competition, the tax of fixed amount is a
condition precedent to production. It might be inferred that
the tax would therefore be an addition to the necessary cost
of production, which must be shifted to the consumer. But
this is not the case ; for such a tax is even more inimical to
the small producer than a tax on gross product. As the
large producer will pay absolutely no more than his small
competitor, he will prefer, provided the commodities are
reproducible to any extent, to assume the tax and to recoup
himself by capturing the customers of the smaller dealer.
The minor producer who is thus unable to add the tax to
the price will be crowded out of existence. Thus the fixed
license tax, when high enough to tempt the large dealer,
tends to be borne by the producer until, indeed, the grad-
ual trend toward monopoly, fostered by the tax, may bring
about a rise of price and thus affect the interests of the
customer. Here again, however, it would.be only indirectly
the tax that would cause the rise of price. But it may

Taxes on Profits 293

frequently happen that the price will not rise at all, the in-
creased sales of the fewer producers compensating them for
the tax which they pay. In such a case, the incidence of the
tax may in a certain sense be declared to be neither on the
consumers nor on the producers who continue to produce
permanently after the imposition of the tax ; for the whole
tax may be discounted and borne by the unfortunate pro-
ducers who are crowded out of existence. Thus the system
of high liquor licenses does not necessarily result in any
increased price to the consumer. Its effect may be a dimi-
nution of the saloons and the gradual monopolization of the
trade in the hands of the wealthier individuals. The pro-
ducer then always pays this tax ; the consumer may or may
not be affected ultimately.

Of course, when the so-called "license taxes " are not fixed
in amount, but vary with gross receipts or gross produce or
net profits, their incidence is governed by the rules laid down
in the preceding paragraphs. The word " license " covers a
multitude of very distinct taxes.

In summing up the preceding discussion, we come to the
following conclusions: the incidence of a tax on monopoly
revenue is always on the producer, except in the case where
the tax is proportioned to the amount produced or soldi in
which case the tax is ordinarily shifted in whole or in part,
although even there, under certain conditions, the tax may re-
main on the monopolist producer ; a general tax on competi-
tive profits, whether fixed or proportional to net receipts, rests
on the producer; a special tax on competitive net receipts
is ordinarily shifted to the consumer; and a roundabout
tax on competitive profits, in the shape of a tax on gross
receipts or gross produce, may or may not be shifted to the
consumer with the probability that, in the great majority
of cases, the whole, or almost the whole, of the tax will be so
shifted.

This conclusion may not be satisfactory to the sticklers for
over-precision or for " natural laws " of incidence. But it

294 Shifting and Incidence of Taxation

will be sufficient to show the delicacy of the problem, and to
prove how superficial is the optimistic or general diffusion
theory.

If we wish to draw any inferences as to some existing
problems in the United States, they may be summarized as
follows :

(1) The so-called "business" taxes are not necessarily
any more " direct " taxes than are the national internal reve-
nue taxes.

(2) Taxes on pure monopolies should not be levied on
gross product or on gross receipts if it is desired that they
should remain on the monopoly.

(3) Taxes on corporations should be levied on net receipts
rather than on gross receipts or on other elements, if it is not
intended that the taxes should be shifted to the community.

(4) Business taxes in general, including the so-called
license taxes, should be levied according to net receipts.
The so-called license taxes, when of fixed amount, further
the trend toward monopoly ; and when graduated according
to sales tend to be shifted to the consumer.

(5) Excise or internal revenue taxes, when levied on gross
product, are apt to be shifted to the consumer. But the degree
to which they will be shifted depends chiefly on three points :
(a) whether the business is of a monopolistic or of a competi-
tive nature ; (b) whether the elasticity of demand is great or
small ; and (c) whether the relation of product to cost is con-
stant or not. There is always a possibility that a portion of
the tax may rest on the producer.

The application of the general principles of the taxation of
profits to land, houses, debts and mortgages has already been
made in preceding chapters, and needs no further discussion.

CHAPTER VI

TAXES ON WAGES

IT has been customary, since the time of Adam Smith, to
make a distinction between the wages of ordinary labor and
what he calls " the recompense of ingenious artists and men
of liberal professions." Let us, then, first take up the inci-
dence of a tax on the latter class.

Adam Smith maintained that a tax on such skilled employ-
ments would be shifted, because this recompense "necessarily
keeps a certain proportion to the emoluments of inferior
trades." l Unless their recompense increased by the amount
of the tax, these professions, "being no longer on a level
with other trades, would be so much deserted that they would
soon return to that level." On the other hand, John Stuart
Mill maintained that all the skilled and privileged employ-
ments are taken out of the sphere of competition by a natural
or conferred monopoly, and that a tax will always fall on
them, because they have no means of relieving themselves at
the expense of any other class. 2 Which of these two state-
ments is correct ?

It would seem that in the main Mill is right, although his
reasons are not entirely above criticism. It is true that the
earnings of professionals are in general regulated by custom
rather than by competition. For a large class, moreover, the
superior earnings must be regarded in the light of what Mar-
shall terms quasi-rents. A great tenor, an eminent surgeon
or a famous lawyer, for example, will not receive more for
their services, if a tax be imposed on the class to which they
belong. To them a tax simply means a burden which cannot

1 Cf. above, p. 115. 2 Mill, Principles, book v, chap, iii, 4.

295

\

296 Shifting and Incidence of Taxation

be shifted. If the tax had not been imposed, their earnings
would have been the same. Moreover, the whole class of
professional workers is in many respects subject to influences
of a more or less uneconomic kind. Their motives are fre-
quently not pecuniary, but rather of a higher nature. An
actor, a painter, a doctor, a lawyer, often adopts his profes-
sion with other objects in view than simply making his living
or obtaining the greatest possible income. It is not long
since the recompense to certain professional classes, like
doctors, was regarded as a gratuity, not as a legally enforce-
able due. Even if we regard these classes from the purely
economic standpoint, we cannot say that their recompense
bears any necessary proportion to common wages. The
earnings of the liberal professions are not dependent on cost
of production. It is only by a perversion of words and of
facts that we can consider the time and efforts spent in
educating a member of a profession as a capital which must
earn interest. In fact, the present alleged overfilling of the
professions is due not so much to the hope of greater earn-
ings as to the compulsory education and general social condi-
tions of modern times. The forces which keep the price of
labor in general at a certain level do not operate with equal
effect in this field. The price of labor in professional occu-
pations, in short, is not competitive, but is either customary
or monopolistic. v

Salaried public officials belong to a similar category ; for
governmental salaries depend primarily on the relative desir-
ability of governmental service, and on considerations of
imagined political expediency. They may be highest in
countries where the usual level of wages is lowest. Even if
this were not so, it would be hard to say on whom a tax on
official salaries could be shifted. Surely not on the govern-
ment, because it does not enter the market as a producer;
nor does it follow ordinary commercial principles. If the
tax be sufficiently high to render the position undesirable, it
may result in less efficient, and therefore in the long run
more expensive, work. The community at large will suffer

Taxes on Wages 297

from a poor civil service. But the tax, as such, cannot be
shifted.

When, however, we come to the ordinary wages of the
common artisan, whether skilled or unskilled, the matter is
not so simple. We have seen that the older theory main-
tains that a direct tax on wages falls on profits, because
wages are necessarily fixed by the cost of living, or the
standard of life. But, in the course of our sketch of the
history of the doctrine, we learned some of the objections
made to this theory. These may be summed up as
follows :

(i) It is assumed that laborers will not consent to accept a
reduction in their standard of life. This, however, is largely a
question of power between the wage-earner and the employer.
It is impossible to say in advance who will win. If wages
were actually fixed by the bare minimum of subsistence,
then, indeed, a tax on wages would necessarily be shifted.
Although Ricardo was not, properly speaking, a believer in
the iron law of wages, he makes use of this very argument
to prove his point. The fact is that wages are never at this
point of bare subsistence: the standard of life is always
above this limit. Between this limit and the actual standard
of wages there is a margin on which a tax may encroach.
An irruption of low-priced immigrants, other things being
equal, will inevitably lower the standard of life and the
general rate of wages. So also a tax on wages which will,
at first at all events, fall on the laborer, may equally well
lower his standard of life, by making it impossible for him
to procure the conveniences to which he has been accustomed.
The wage-earner will, of course, strive to reimburse himself
by demanding higher wages ; but there is no reason why the
employer should be compelled to acquiesce. If that were
true, no reduction of wages would ever be possible, because
a reduction of wages always implies a lowering of the stand-
ard of life. Whether or not a tax on wages will be shifted
on profits, even in the long run, depends entirely on the
relative strength of the labor organizations and on other

298 Shifting and Incidence of Taxation

itions which may compel the employer to pay an /
ase of waes equivalent to the amount of the tax. ^

conditions

increase of wages equivalent

Whenever such conditions are not present and they are

frequently absent the tax will rest on the wage-earner,

and trench on the margin above the bare rate of subsistence,

thus keeping down the standard of life.

(2) Even granting that a tax on wages may in the long
run, under favorable conditions, be shifted to profits, in the
interval the burden will be borne by the laborer. It is a well-
known fact that in a general rise of prices the price of labor
is always the last to respond to the general impulse. This
interval, however, may become more or less permanent. The
longer the delay, the more severe is the suffering that
ensues, and the greater the prospect that the temporary
diminution of the consumers' effective demand will be con-
verted into a reduction of the laborers' standard of life.

The taxation of labor results in a vicious circle. The
weaker the workman, or the lower his general standard of
life, the less able is he to resist the attempts of the employers
to reduce his wages to the barest minimum. The higher his
wages, the more effective is his power of resistance and com-
pulsion, and the more likely is he to secure a gradual con-
tinual advance of wages. The imposition of a tax on wages
thus injures the workman both temporarily and permanently.
It reduces his standard of life, and, in weakening him, it
renders less easy any future attempt to lift himself out of
his impoverished condition.v If a tax on wages is shifted to
profits at all, it is only after a long and fierce struggle, during
which the laborer may suffer materially, and as a result of
which his whole morale may be lowered. Here again there
is no place for either optimism or absolutism of theory.

CHAPTER VII
OTHER TAXES

THE application of the principles which govern the inci-
dence of taxation to the other taxes that have not yet been
treated calls for but little discussion. The most important
of the remaining taxes are as follows:

I. Poll Taxes

A poll or capitation tax is clearly not susceptible of being
shifted, except to the extent that it falls on the laborer.
Even then, it must trench upon the margin between the
cost of subsistence and his actual standard of life before
the conditions under which the shifting may take place will
be present. The possibility of shifting, moreover, as has
already been indicated, is not by any means the same thing
as the actual shifting itself.

2. Inheritance Taxes

A tax on inheritances or bequests cannot be shifted, for
evidently there is no one to whom it could be transferred.
The ulterior effects of which some writers speak, such as the
influence of inheritance taxes on the accumulation of capital,
do not really illustrate the process of shifting. They are,
moreover, of such doubtful validity that they may be
neglected. 1

1 Professor Bastable {Public Finance, 2d ed., p. 563), for example, bases his
criticism on Ricardo's view that such taxes fall on capital, and thinks that the
whole society will as a result suffer from less efficient production. For a criticism
of this position, see West, The Inheritance Tax, 1895, PP-

299

300 Shifting and Incidence of Taxation

3. Excises

An excise or internal revenue tax may or may not be
shifted. It is virtually one form of the profits tax discussed
above. The problem depends for its solution on the con-
sideration of all the complicated points referred to there. 1
It may be said, however, that in the majority of cases such
a tax tends to be shifted in whole or in greater part.

Much the same may be said of an import duty. As a
general rule, this tax will be partially or completely shifted ;
but the exact result will depend on the particular conditions
of the individual cases in question. The application of the
general principles of incidence to customs duties is so impor-
tant as to warrant a somewhat more extended discussion.

4. Import and Export Duties

The theory of international value, as it has been success-
fully developed by the classical economists, is nothing but
an application, although an exceedingly complicated one,
of the general law of value. 2 The elements that enter into
the equation of international demand are so numerous and
so complex that an investigation of the actual effects of
a tax upon any one class of commodities would require for
its proper solution not only an acquaintance with the details
of the theory itself, but also an intimate knowledge of all the
forces influencing the supply of, and the demand for, the
commodities affected in the two countries immediately con-
cerned as well as in all the other countries that constitute

1 Above, pp. 270-294.

2 The most successful restatements of the theory by modern authors are to
be found in Bastable, The Theory of International Trade, "with Some of its Appli-
cations to Economic Policy, 2d ed., 1897, an d Edgeworth, "The Theory of Inter-
national Values," a series of articles in the Economic Journal, iv (1894), pp.
35-50, 424-443, 606-638. The particular question of the shifting of a tariff tax
was treated by Professor Bastable in his " Incidence and Effects of Import and
Export Duties," in the Report of the British Association for 1889, pp. 440 et seq+

Other Taxes 301

the world market. 1 Among the considerations affecting the
problem of the incidence of a tax on imports or exports, the
following are the more important :

(i) To what extent does the exporting country control
the supply of the commodity ? (2) To what extent does
the importing country constitute the sole market for the
commodity ? (3) To what extent can the commodity in
question be produced at home ? (4) What is the ratio of
product to cost ? (5) To what extent is the demand elastic ?

Let us take up first the questions connected with an
import duty. The imposition of the tax may be considered,
in ordinary cases, as an addition to the cost of production,
and as such increases the price of the article in the importing
country by the amount of the duty. Under such conditions
it is true that " a tariff is a tax," and that it falls on the con-
sumer. This conclusion is based on the assumption that the
producers do not bear any of the tax; that, although the
sales necessarily fall off more or less, according as the de-
mand is sensitive or not, by reason of the increased price,
the producers find an outlet for their goods in some other
country, so as to recompense them for the partial loss of the
market in the country which imposes the tax.

This assumption, however, is not always correct. It may
happen that the importing country constitutes either the sole
market for the commodity, or such an important part of the
market that the producer finds it impossible or difficult to
extend his sales in other countries. To the extent that this
is true, the producer finds it to his interest to avoid any sub-
stantial diminution of the demand in his chief market. This
can be accomplished, however, only by his consenting to bear
a portion of the tax himself. The case that is most favorable

1 As against those who expect a precise answer to every practical problem of
the effect of a tariff, the statement of Professor Nicholson seems almost justifiable,
that in many cases " the only answer is that an answer is impossible." In another
place he says that " the incidence of import and export duties, especially when
the indirect effects are considered, is the most complicated and difficult problem
in economics." " Tariffs and International Commerce." By J. S. Nicholson.
In the Scottish Geographical Magazine, September, 1891.

302 Shifting and Incidence of Taxation

to the consumer in the importing country is : first, that the
importing country constitutes the sole market for the com-
modity; and, second, that the demand for the commodity is
so very elastic that a slight increase of price causes a very
great diminution in the sales. But from this very exceptional
case, where the producer tends to bear a large share of the
tax, down to the ordinary case, where the consumer bears the
whole of the tax, there are all kinds of gradations.

Another very important element in the problem is the
extent to which the home production in the importing country
may fill the gap caused by the diminution in the imports from
the exporting country. The ordinary reasoning that " a tariff
is a tax " is based on the assumption, as we have seen, that
the equilibrium will be reached when the decreased supply
from the foreign country sells at the increased price. If the
home country cannot produce the article at all that is, if
the exporting country has a monopoly of the supply this
assumption is valid. But if the home country has hitherto
been prevented from producing the article solely because the
price has been too low to admit of profits, the degree to which
home production can round out the supply depends entirely
on the extent to which the price rises. Suppose that an im-
ported commodity can be produced abroad so as to sell in the
importing country at $10.00, while it can be produced in the
importing country only at $12.50. If a tax of $2.00 per unit is
imposed, other things being assumed as equal, the price will
rise to $12.00, and the demand will fall off. But suppose that
the importing country can now furnish a part of the supply,
and because of the larger output will be able to produce with
profit at $11.00. Notwithstanding the tax of $2.00, the price
cannot rise above $i i.oo, the demand will not fall off as much
as before, and the tax will be divided between the foreign
producer and the home consumer. The extent to which the
home producer can capture a part of the market depends,
among other things, upon the ratio of product to cost. If the
commodity is produced at home under the law of increasing
cost, which as we have seen is the usual case in competitive

Other Taxes 303

industries, the chance of the home producer is not so good ;
if under the law of decreasing cost, which as we know
implies a trend toward monopoly, his chances are better.
But it is obvious that cases may arise where it is not true
that " the tariff is a tax " in the sense that the whole burden
of an import duty is necessarily borne by the consumer. 1

The indirect effects of an import duty are interesting, but
lie beyond the scope of this inquiry. From the point of view
of revenue, it is clear that the greater the supply that is
captured by the home producer, the less will be the proceeds
of the tax. If the foreign producer is entirely shut out, the
revenue will be zero. The amount of the immediate loss to
the community in general will thus depend on the price at
which the home producer can afford to sell. If, in the
extreme case mentioned, the home producer supplies the
entire market at a price of $12.00, the government loses its
whole revenue from the tax, and the consumers lose the entire
amount of the tax through the increase of price. If, on the
other hand, the price of the home product after the shutting
out of foreign competition and the development of improved
processes at home can be finally brought down to a point
lower than $10.00, the revenue will indeed still be zero, but the
consumers will lose nothing, and the community will have
gained the advantages resulting from an increase of industry.
This, however, brings us at once to the controversy between
free trade and protection a controversy that can be settled
only by considering the wider and more permanent results of
an international industrial policy. What concern us here are
the immediate results, or the actual incidence of an import
duty.

In the case of an export duty, much the same conclusions

1 This is now recognized by the foremost writers on the subject. Cf. the quo-
tations in Professor Edgeworth's article in the Economic Journal, iv, p. 43, and
his own statements, ibid., pp. 46-48. The conclusions to which Professor Carver
comes in his article on "The Shifting of Taxes" in the Yale Review, v, p. 271,
are therefore really not "opposed to the orthodox teachings" on the subject,
as he assumes, if by orthodoxy we mean the views commonly held to be
authoritative.

304 Shifting and Incidence of Taxation

can be reached. An export duty ordinarily falls on the citi-
zen of the exporting country. But if the duty is imposed on
a commodity of which the country has a monopoly, and
still more if the demand for this monopolized commodity is
comparatively persistent, it may happen that an export tax
will be shifted to the foreign consumer. It is noteworthy
that the chief examples of export duties still to be found are
those of duties on articles which approach the conditions of
monopoly supply. Such are, for example, the export duties
on opium in India and on guano in Peru. But it is to be ob-
served that the cases of perfectly stable demand, even for a
monopolized article, are exceedingly rare. 1 There is scarcely
any commodity for which some substitute, even though it be
incomplete, cannot be found. To the extent that this is true,
more and more of the export duty will be borne by the mo-
nopolist exporter for fear that the decrease of sales, even at a
higher price, will lower his maximum monopoly revenue.

5. Stamp Taxes

Stamp taxes are usually supposed to be shifted to the con-
sumer or purchaser. This does not, however, necessarily fol-
low. If the stamp taxes are imposed on the sale of particular
commodities as, for instance, the American internal revenue
duty on proprietary medicines we are confronted by what
is an ordinary form of the taxation of profits discussed above.
This is equally true when the so-called stamp taxes are noth-
ing but taxes on production, levied by means of a stamp, as
in the American taxes on tobacco, whiskey and beer. Stamp
taxes here do not really form a distinct kind of taxes.

If the stamp taxes are, however, taxes on transportation
and communication, much again will depend on the height of
the tax, the character of the business and the elasticity of
the demand. For instance, in the case of the American war
revenue taxes of 1 898, the one cent tax on telegraph messages
and on express receipts has been shifted to the consumer,

1 See above, pp. 189-191.

Other Taxes 305

partly because the tax was high enough, from the standpoint
of the telegraph and express companies, to warrant an attempt
to throw it on the sender of the message or parcel, and partly
because the tax was at the same time so low that the con-
sumer did not care to abandon the use of those particular
media of communication and transportation. The telegraph
is used in America almost exclusively for purposes of busi-
ness ; and the service may to a large extent be classed as a
necessary, with comparative inelasticity of demand. The ex-
press companies, moreover, even in that part of their transac-
tion where they come into competition with the postal service,
do not run much risk of reducing their business by adding
the tax to the price.

On the other hand, the one cent tax on parlor car tickets
has been borne by the transportation companies, partly be-
cause of their fear of losing their patronage, partly because
the tax constitutes a less important percentage of the price
than in the preceding cases. From the consumer's stand-
point, in the case of a moderate comfort like the parlor car
service, even a slight addition to price may mean a considera-
ble diminution of demand for the service. From the pro-
ducer's standpoint, one cent on a sum ranging from two to
four dollars (the average price of a parlor car ticket) is of
considerably less consequence than one cent on a sum rang-
ing from twenty-five to forty cents (the average price of a
telegraph message or express shipment). Even here, how-
ever, it is open to question whether the conditions of com-
parative elasticity of demand and supply will not change to
such an extent as to cause the tax on parlor car tickets to be
shifted to the consumer, just as the ordinary tax on railroad
tickets in the continental countries of Europe is also borne
by the passenger.

Finally, when a substantial tax is imposed on an act of
communication or of transportation, where the demand is
sensitive, the tax may, in rare instances, seem to have the
very exceptional result of lowering prices. When the United
States, for instance, imposed, in 1898, a one cent tax on ordi-

306 Shifting and Incidence of Taxation

nary fifteen cent telephone messages, the telephone com-
panies were so apprehensive of diminishing their maximum
monopoly revenue, that they not only decided to refrain from
adding the tax to the price, but also resolved to evade the
tax entirely by reducing telephone messages to a price below
fifteen cents. Ordinarily, however, a monopoly like the tele-
phone company would be presumed to have realized its
maximum advantage at the price current before the imposi-
tion of the tax. The tax may, indeed, in this particular case,
have led the company to consider the whole matter anew ;
but, after all, the reduction of the price would have ulti-
mately come about, tax or no tax. The tax, therefore, was
the occasion, rather than the cause, of lower prices.

When the stamp taxes are taxes on acts or transactions,
the incidence will depend on whether these transactions are
of a commercial character. In the case of judicial taxes,
sometimes termed court costs and fees, there is evidently no
one to whom the taxpayer can shift the burden. In the
case of ordinary commercial transactions, the important con-
siderations, again, will be the height of the tax and the
elasticity of the demand. When the tax is very insignificant,
as in the case of a tax on the ordinary receipts of sales, the
merchant is very apt to bear the tax himself. When the tax
is sufficiently large to make it an inducement to the seller to
shift the burden, the tax, if imposed on him, will usually be
shifted to the buyer, except to the extent that this shifting
will diminish the number of transactions and thus induce the
seller to bear a part of the burden himself. In such cases,
the burden is apt to be divided in accordance with the rela-
tive elasticity of demand and supply. The net result may
then be a diminution of transactions. The chief reason, for
example, why there exists in the French cities no such impor-
tant class of real estate brokers and speculative builders as
in the American cities, is to be found in the high French
taxes on transfers of land. Finally, when the stamp taxes
are imposed on the transfers of capital, as between lender
and borrower, it is clear that the tax will be largely borne by

Other Taxes 307

the borrower, in accordance with the principles laid down
above.

6. Income Taxes

The incidence of an income tax has been much discussed.
One writer has even attempted to prove that an equal tax on
incomes is the only tax that cannot be shifted. 1 He draws
the conclusion that the income tax must therefore be the
ideal the only possible realization of the principle of
equality of taxation. This contention, however, is open to
criticism for two reasons. In the first place, we have seen
that there are many other taxes which cannot be shifted
like the poll tax, taxes on inheritances, on rent, on salaries,
and certain taxes on monopolies. Secondly, and more impor-
tant, it is untrue that the income tax, as frequently levied,
cannot be shifted.

In some countries, as in England, the income tax is simply
a combination of taxes on the separate ingredients of income,
and it often happens that the so-called income tax is, in real-
ity, a system of taxes on gross revenue or gross receipts. In
such cases there can be no question that each part of the
income tax follows the laws of incidence of the respective sepa-
rate taxes, so that there is, in respect of incidence, practically
no difference between a so-called income tax and the other
direct taxes of which the income tax is substantially composed.
If the total income is composed of wages, the law of incidence
cannot be different, whether we call the share income or
wages. If the total income is composed of profits in the
broad sense, the tax will be shifted or not, according to the
rules of incidence that govern a tax on profits. If the income
is derived from house rents, the final burden will be borne in
accordance with the principles laid down in discussing the tax
on real estate. If some of the separate parts are shifted, the
whole cannot possibly remain unshifted.

In those cases, indeed, where the tax is levied on pure
income in the strict economic sense, the tax is substantially

1 Kaizl, Die Lehre von der Uebcrwahung der Steuern> pp. ioi-il8.

308 Shifting and Incidence of Taxation

a tax on economic rent, plus a tax on net profits, plus a tax
on wages. Now, the tax on economic rent and on net profits
cannot be shifted ; and, therefore, as regards all members of
the community except the wage-earners, a tax levied on pure
income tends to stay where it is imposed. So far as the lowest
incomes are exempted from the tax, the tendency would also
be for the income tax on the laborers to stay where it is put.
But, even in such cases, there is no absolute certainty that
the income tax will not be shifted. In actual life, of course,
as we very rarely find either a pure income tax or an equal
income tax, we cannot safely rely on the complete non-trans-
ferability of the tax. Nevertheless, to the extent that the tax
; may be considered one on surplus, rather than on margin, the
chances are that the tax will remain where it is originally
placed.

This entire question, however, like that of the incidence

of stamp duties and taxes on exchange, as well as the wider

i' problem of the shifting of all taxes from the consumer onward,

A practically resolves itself into the old problem whether a tax

C \ is to be regarded as a cost of production or an outlay for

consumption.

In all the cases that we have thus far discussed we have
traced the shifting of taxes down to the consumer. Certain
taxes, we have found, are never shifted ; other taxes are some-
times shifted in whole or in part to the consumer. But will
not the consumer in turn shift the burden to some one else ?
Here we must remember the theory of Canard, Thiers and
Stein, that every tax is shifted on everybody that every
consumer will again shift the tax on a third party, and that
this third party who is again a consumer will shift it to some
one else and so on ad infinitum. Since every one is a con-
sumer, every one will thus bear a portion of the taxes that
everybody else pays.

The error of this doctrine lies in the failure to distinguish
between productive and unproductive consumption. If every
taxpayer were engaged in production and paid taxes only on
what he employed for the purposes of further production,

Other Taxes 309

there might be some truth in the foregoing doctrine. Many
taxes fall on individuals who are not producers at all, so
that there is no question of any shifting to the consumer,
while each consumer uses only a part of the commodities
consumed by him for productive purposes. Every one con-
sumes unproductively. Whatever an individual spends on
luxuries, or on anything but necessaries, is an expenditure
which, so far as he is concerned, does not give rise to any
further relations of producer and consumer. If the consumer,
on whom a certain tax has been shifted, spends his income
in buying diamonds, on whom can he possibly shift the tax ?
Not on the diamond dealer, because he does not stand in any
relation of producer to the dealer. He may indeed buy fewer
diamonds than he would have bought if the tax had not been
imposed, but he cannot shift the tax. The shifting of the
tax is not the same thing as the result of the tax. What
is true of the diamond purchaser is true of all who consume
for purposes other than those of production. So that there
is no indefinite diffusion of taxes.

Only so far as the individual purchases or consumes a com-
modity in order to produce other commodities with it, will the
condition arise under which he as producer will be able to
shift the tax proper on to another consumer. Here, again,
the possible conditions are not necessarily the actual facts.
Just as only some producers and even they only under
certain circumstances will be able to shift the tax, so only
some of the consumers (who must in this respect be regarded
as producers) and they only in part will be able to shift
the tax. Hence the theory of the general diffusion of taxa-
tion is untenable, whether the theory asserts that all taxes are
equally spread throughout the community, or that they will
inevitably rest at last on some one class.

CHAPTER VIII

CONCLUSION

WE come now to the close of our investigation, and to the
consideration of the question whether the theory of incidence
contains by inference any advice for the statesman engaged
in framing a scheme of taxation. What is the practical
result of our discussion ? What weight should be attached
to theories of incidence in constructing a positive system of
public contributions ?

In the first place, we have seen that there is no room for
optimism of theory. The legislator cannot rightfully shut
his ears to any cry for reform, on the plea that all old taxes
tend to become good taxes. Nor dare he complacently
f grasp any new source of revenue, on the assumption that
all taxes, no matter how levied, will ultimately be borne by
the community at large. The theory that " all taxes fall on
everybody" and are therefore just, is incorrect because it
assumes that all taxes are a part of the cost of production.
This assumption is untrue, because some taxes are levied on
persons, or property, or revenue, where there is no further
relation of producer and consumer. Even if all taxes were
to be regarded as additions to the cost of production, it would
not follow that the taxes would be shifted to the consumers
in any definite proportion to their faculty or ability to pay,
which is the only test of justice in taxation. If all taxes did
really fall on everybody, taxation would be proportional to
expenditure; and expenditure is, of all bases of taxation,
the least equitable. Thus the optimistic theory must be
discarded : first, because the general diffusion doctrine is
untrue ; and, second, because if it were true, it would cause

310

Conclusion 311

injustice. The legislator cannot shirk his duty in this easy-
going way.

On the other hand, there is no good reason for pessimism
or agnosticism. Some writers, as we know, claim that it is
useless to construct any system of taxation, because it is im-
possible to foresee the ultimate consequences of any tax.
But this hopeless attitude we have found to be mistaken. It
is true, indeed, that the distinction between direct and indi-
rect taxes is robbed of much of its value ; for many of the
so-called direct taxes may be shifted in the same way as
the so-called indirect taxes. In common parlance the dis-
tinction between direct and indirect taxes is practically rele-
gated to the mind of the legislator : what he wishes to have
borne by the original taxpayer is called a direct tax, what he
intends to have borne by some one else than the original
taxpayer is called indirect. Unfortunately the intention of
the legislator is not identical with the actual result. We
must, then, either revise our nomenclature or declare the
present distinction of little value.

While the mere fact that a tax is called a direct tax does
not show that it may not be shifted, the preceding discussion
has shown that certain general tendencies may be clearly
defined. What are these general tendencies of incidence?
They may be summed up under four heads.

In the first place all taxable objects may be looked at from
the standpoint of property or from that of revenue. Re-
garded from the former point of view, we have found that
unequal or partial taxes on revenue-yielding property tend
to be a charge neither on the community nor on the future
possessors, but only on the holders at the time the tax is
imposed. The capitalization theory comes into play when-
ever a new tax is assessed on certain classes of property or
the rate of an existing tax is altered. The tax is never
shifted onward, but its results are serious, whether for good
or for evil, to the class of initial owners alone. The lesson
which the capitalization theory has to teach is that the evils
of inequality of taxation are doubly intensified when the

312 Shifting and Incidence of Taxation

inequality attaches to revenue-yielding property, and that the
ultimate equalization of the burden, if it come at all, can be
attained only at the expense of the unfortunate present
holders.

Secondly, if we look at taxable objects from the standpoint
of revenue, we have found that there are only two kinds of
revenue on which a tax, when once imposed, necessarily
remains. These are economic rent and pure profits, or, to
use a term which has sometimes been adopted to include
both elements, economic surplus. A tax on surplus can
never be shifted, because surplus is not a part of cost of pro-
duction, but the result of process of production. Thus, taxes
on inheritance, gifts, gains from speculation, etc., cannot be
shifted, because they are a part of surplus, of pure profits.
If it were possible, then, to find a class whose revenue con-
sisted exclusively of economic rent and pure profits, the
legislator might single out this class either for taxation or
for exemption, according as it was the general policy to
have taxes paid directly or indirectly.

In the third place, all remaining taxes tend, in the abstract,
to be shifted, until they fall ultimately on this surplus, be-
cause all other taxes tend to form a part of cost of produc-
tion. The conclusion might, therefore, be drawn, that taxes
should be levied either on net profits alone or on commodi-
ties in the latter case, falling in the long run on profits,
but without the knowledge of the profit-receiver. In either
case, taxes on wages would be regarded as part of the cost of
production, and would be shifted from wages to profits.

Such conclusions rest on doctrines very like those that we
discussed under the head of "absolute theories." They tend
to be true only in an isolated community where there is com-
plete mobility of labor and capital, and where the economic
man reigns supreme. In actual life, these tendencies are
met by the counter tendencies of "economic friction."
Taxes on land often tend to stay where they are put, be-
cause of international relations and the lack of absolute
transferability of capital; taxes on wages, if cunningly im-

Conclusion 313

posed, may lead to a lowering, instead of to a heightening,
of the standard of life ; taxes on occupiers of houses are not
necessarily shifted to the owners ; and so on.

Fourthly, above all, we must distinguish between kinds of
revenue and classes of society. Economic surplus, pure
rent and pure profit may mean the entire revenue of some
individuals, but only part of the revenue of others. As we
have already pointed out, the mere fact that a tax may be
shifted by a class does not show that the tax may not press
very unequally upon individual members of the class. If
we thus change the point of view from social classes to indi-
viduals, we see how untenable is the argument that the best
tax is an indirect tax, because it will ultimately be shifted to
the economic surplus of society. For such a tax can get to
economic surplus only through the productive consumption
of individuals that is, through expenditures which again
create relations of producer and consumer. But as we have
just pointed out, not all consumption is productive consump-
tion ; and expenditure in general is the least equitable basis
of taxation, because it always bears with greater weight upon
the less fortunate or more deserving members of any social
class.

The advice, therefore, which the correct theory of inci-
dence has to offer to the legislator is : Choose primarily those
taxes the results of which can be foretold with some degree of
accuracy ; at all events, take some taxes where the chances
of shifting are very slight, and take, on the other hand, taxes
which will be shifted in their entirety. In the former class
are included certain taxes on monopolies, net profits, inheri-
tances and definite forms of property and income. In the
latter class are included taxes on commodities in the shape
of import duties, certain excise taxes and licenses, and taxes
on gross receipts of corporations. If the legislator desires
to reach certain classes of society directly, let him choose the
first kind of taxes ; if he desires to have his taxes paid una-
wares, let him choose the second. If neither the one nor the
other kind of taxes suffices for the public revenue, the legis-

314 Shifting and Incidence of Taxation

lator will be compelled, as is often the case, to resort to taxes,
the incidence of which is more uncertain, and where the
intentions of the legislator may be entirely frustrated by
the actual course of events.

The theory of incidence has therefore important, but by
no means final, advice to offer in the elaboration of a tax
system. It does not by any means render unnecessary the
study of the principles of justice and equality in taxation.
If neither the optimistic, nor the pessimistic, nor the agnostic
theory of incidence can be any longer upheld, the student of
public finance must seek to elaborate the rules of equitable
taxation without any reliance upon the automatic operation
of presumed absolute laws. He must endeavor to make a
choice of public revenues which in themselves satisfy the
requirement of the principles of economic justice ; and in so
doing he may be guided by those principles of incidence,
but only by those, which are definite and well ascertained.
The theory of shifting of taxation is, therefore, an aid to, but
not a substitute for, the study of economic justice. As has
been well said, the doctrine of incidence is neither the arch-
angel nor the archfiend of the science of finance.

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I Government] II Revolution, etc., etc. VII Taxation and VIII
The Present War. 4th ed., Glasgow, 1794.

ANONYMOUS

Considerations on the National Debt and nett Produce of the Revenue
with a Plan for consolidating into one Rate the Land and all other
Taxes, by which More Money will be raised , Individuals not pay
half the present Taxes ; Smuggling altogether prevented ; the poor
exempted from every Contribution, etc. By a Merchant of London.
London, 1784.

Historical and Political Remarks upon the Tariff of the Commercial
Treaty: With Preliminary Observations. [By A. C. Schomberg.]
London, 1787.

Six Letters on Excise, and particidarly on the Act passed in 1789 for
subjecting the Manufacturers of and Dealers in Tobacco and Snuff
to the Laws of Excise. London, 1790.

An Attempt to shew the Justice and Expediency of substituting an Income
or Property Tax for the present Taxes, or a Part of them ; as afford-
ing the most equitable, the least injurious and (imder the modified
Procedure siiggested therein) the least obnoxious Mode of Taxation.
[By Benjamin Sayer.] London, 1833.

A Familiar Treatise on Taxation, Free Trade, etc., comprising Facts
usually unnoticed or unconsidered in Theories of those Subjects.
London, 1846.

INDEX OF AUTHORS

Asgill, J., 74.

Ashley, J., 53.

Auspitz und Lieben, 1 68.

Barone, E., 172.

Bastable, C. F., 57, 86, 160, 241, 242,

299, 300.

Baudeau, N., 95, 106, 138.
Baxter, R. D., 143.
Biersack, H. L., 152.
Blanc-Gilli, M., 65.
Blunden, G. H., 232, 234.
Boisguillebert, 90.
Bolles, A. S., 135, 136.
Brentano, L., 31.
Broglie, Due de, 131.
Buchanan, D., 119, 157.
Burnaby, A., 22.

Canard, F., 125-128.

Cannan, E., 234.

Cantillon, R., 75.

Carver, T. N., 197, 303.

Gary, J., 26, 40, 41.

Chamberlayne, E., 55.

Cherbuliez, A. E., 128, 141.

Child, J., 39, 40.

Cleeve, B., 64.

Cliffe-Leslie, T. E., 159, 255, 267, 290.

Cohn, G., 156.

Conigliani, C. A., 170-172.

Cooley, T. M., 133.

Courcelle-Seneuil, J. C., 128.

Cournot, A., 144, 165, 166, 276, 281.

Cradock, F., 13.

Craig, J., 138, 140, 142.

Culpeper, T., 13, 14, 22, 66.

Cunningham, W., 37, 57.

D'Anvers, C, 48, 51.

Davenant, C, 67, 73, 74, 75.

Decker, M., 57, 60, 6l.

De Foe, D., 26, 67.

De la Court, P., 34.

Denis, H., 140.

De Witt, J., 34.

Dickson, A., 123.

Drake, J., 69.

Dupont de Nemours, 95, 104-106, 109.

Dupuit, A. J. E. J., 1 68.

Edgeworth, F. Y., 172-174, 212, 241,
242, 253, 274-278, 287, 300, 303.

Falck, G. v., 7, 165.
Farrar, T. H., 254.
Fauquier, F., 17, 28, 62.
Fauveau, G., 166.
Fawcett, H., 159, 257, 258, 282.
Florez-Estrada, A., 222, 224.
Forster, N., 44, 59.
Franklin, B., 109, no.
Fulda, F. K. v., 152.

Galibert, L., 222.

Gamier, J., 149.

Gibbon, A., 132.

Conner, E. C. K., 57.

Goschen, G. J., 232, 249, 250.

Graslin, L. F., 109, in.

Graziani, A., 160, 241, 274, 276, 277, 287.

Gregg, 142.

Gunton, G., 283.

Hamilton, A., 109, no, 133, 134.
Held, A., 161, 162.
Helferich, J. A. R. v., 144.

335

336

Higgs, H., 96.
Hobbes, T. 12.
Hock, C. F. v., 144, 154.
Hoffmann, J. G., 139.
Horsley 63.
Houghton, J., 32, 36.
Hume, D., 85, 86.

Inama-Sternegg, K. P. v., 90.

Jakob, L. H. v., 152.
Jenkin, F. 167, 279.
Jones, R., 157.

Kaizl, J., 7, 165, 307.
Kroncke, K., 265.

Laspeyres, E., 34.

Lassalle, F., 163.

Launhardt, W., 168.

Leroy-Beaulieu, P., no, III, 141, 151.

Leser, E., 12.

Le Trosne, G.-F., 107.

Linden, Cort van der, 1 32.

Locke, J., 71-73, 81, 84, 85.

Loria, A., 287.

McCulloch, J. R., 158, 159.

Malchus, C. A. v., 152.

Mangoldt, H. K. E. v., 145.

Manley, T., 31, 39.

Mansfield, Lord, 123.

Marshall, A., 172, 212, 280.

Martin, R. M., 132.

Massie, J., 44, 63, 64.

Mill, J., 158.

Mill, J. S., 143, 158, 226, 237, 242, 263,

282, 295.

Mirabeau, Le Marquis de, 95, 102, in.
Mun, T., 13, 14, 28.
Murhard, K., 139, 152.
Myrbach, 244.

Nicholson, J. S., 301.
Nickolls, J., 29, 43, 57, 58.
Noble, J., 143.
Nugent, R., 42, 83, 84.

Index of Authors

Overstone, Lord, 35, 38, 39.

Pantaleoni, M., 140, 145, 167, 168, 190,

I97 2 35 2 40, 262, 265.
Parieu, E. de, 141, 149-151, 282.
Passy, H., 140.

Petty, Sir W., 18-21, 33, 81, 221.
Philips, F., 25.

Pierson, N. G., 132, 145, 249.
Postlethwayt, M., 43, 59, 84.
Prince-Smith, J., 155, 156.
Prittwitz, M. v., 129.
Proudhon, P. J., 134, 135.
Prynne, W., 25.
Pulteney, W., 29, 48.
Puynode, G. du, 141, 151, 230, 282.

Quesnay, F., 95, 96-102.

Rau, K. H., 144, 153, 265.

Reynell, C., 82.

Ricardo, D., 117-121, 222, 223, 224,

242, 282.

Ricca-Salerno, 12, 90.
Richardson, 57.

Riviere, Mercier de la, 95, 102-104, !"
Roberts, L., 51.
Rogers, J. E. Thorold, 254.
Roscher, W., 3, 90, 121, 156.
Ross, E. A., 218, 287.

Saint-Peravy, IO2.

Sargent, C. H., 234, 257.

Sartorius, G. F., 139.

Say, J.-B., 139, 140, 146, 147.

Schaffle, A. E. F., 145, 156.

Schall, K. F. v., 156.

Schomberg, A. C., 45.

Schulze-Gavernitz, 30, 34.

Senior, N. W., 142, 226.

Shearman, T. G., 164.

Sheridan, T., 23.

Sherman, I., 133.

Sidgwick, H., 143, 237.

Sinclair, Sir J., 12.

Sismondi, S. de, 147-149.

Smith, Adam, 57, 113-117, 252, 282, 295.

Index of Authors

337

Soden, J. G., 152.
Spahr, C. B., 260.
Stein, L. v., 131, 141.
Steuart, J., 85, 87-89.
Stewart, D., 89.
Swift, Dean, 29.

Temple, W., 37, 38.
Temple, Sir W., 33, 34.
Thiers, A., 129-131.
Thiinen, J. H. v., 152, 226, 227.
Tracy, A. L. C., Destutt de, 140.
Tucker, J., 35, 45, 57, 58.
Turgot, G. F., 95, 107-109, III, 138,
266.

Vanderlint, J., 42, 76, 77.
Vauban, M., 90.
z

Verri, P., 122, 123, 125.
Vignes, .,151.
Vocke, W., 156.

Wagner, A., 156.

Wagstaffe, W., 69.

Walker, F. A., 123, 133, 147.

Walpole, R, II, 48, 79.

Walras, L., 141, 168, 169, 189, 190.

Waterhouse, W., 15.

Webb, S., 241, 254, 282.

Wells, D. A., 133.

Wicksell, K., 169, 170, 276, 277, 287.

Wolowski, 141.

Wood, W., 75.

Young, A., 34, 36, 57, 65, 86, 89, in,
Young, J., 124, 125, 138, 142.

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